Tenaga Nasional (TNB MK, BUY, FV: RM7.68, Last Close: RM6.51)

TNB’s 1HFY12 profits were inflated by the RM2bn compensation for additional fuel costs arising from the gas supply shortage. Stripping out this amount and forex gains, its core operating profit still came in within our estimates. As gas supply has normalized, we expect TNB’s profits to bounce back to levels last seen in early 2010. For FY13, a combination of contained coal costs, potentially lower capacity payments and strong demand growth could see TNB post its 2^nd highest core net profit ever. Despite succession concerns, we believe the new CEO has breathing room to familiarize himself with TNB given that it is a GLC.

Within forecasts. TNB’s 2QFY12 results are a little harder to analyze as they included RM1,517m in net compensation from the Government and Petronas (RM2.023bn less RM506m in tax) as part of the fuel cost sharing compensation up to  Oct 2011. We choose to not recognize the RM1,517m as a core profit item, although we acknowledge that this discriminates against TNB. The resultant core net profit of RM867.4m is deemed within our forecasts and consensus. Do note that our forecasts  for  RM2.5bn implies a net profit of RM816m per quarter for the remaining 2 quarters  of  FY12 vs  a core net profit of RM672m in  2Q. We deem this as a slightly stretched but achievable forecast. Having received the compensation amount, TNB’s book value per share  has risen back to a comfortable RM6.41.

Looking ahead. TNB’s management touched upon the following concerns:

• Succession  – The  names of the  candidates for CEO  have been submitted to the Government while an executive search firm has been appointed to look for a new CFO
• Gas supply – Since Jan 2012, gas from Petronas has hovered at around 1100 mmscfd, which meant that TNB required minimal oil & distillates
• 25% Coal export tax  – Management feels that the tax could be delayed or cancelled given  the  strong lobbying from Indonesian coal miners and excess coal from South Africa
• PPA renegotiations – Tenders have been called but management feels that it is unlikely to lead to a significant reduction in capacity payments
• Demand growth  – Surprisingly strong at 4.9% y-o-y from Sept 2011 to March 2012. Management has guided for 4%, which may potentially be exceeded

Maintain  forecasts and  fair value. We are revising upwards our demand growth forecasts but also tweaking down our tariff assumptions, which were previously on the bullish side. The net effect is our FY12 forecasts  remain  largely unchanged but  the FY13 and FY14 net profit forecasts are revised up by 3.2%. Our RM7.68 DCF based fair value implies a PER of 14x on FY13 numbers, a slight stretch over TNB’s historical 13.5x PER, but is justified given a potential rerating post general election. 

Source: OSK188