Tenaga Nasional
(Tenaga) held its first formal “meet the new CEO” briefing. Dato’ Ir. Azman bin
Mohd (Dato’ Azman) is now taking over the reins of CEO (effective 1 July 2012)
from Dato’ Sri Che Khalib, who has been
Tenaga’s President/CEO for the last 8 years.
Both were present during the dialogue session. The session highlighted Dato’ Azman’s focus
over the next year. More importantly, he will continue to champion for a more
consistent method of dealing with fuel cost burdens. This includes implantation
of a minimum Incentive Based Regulation (IBR) which will help Tenaga deliver
fairer returns to shareholders while being efficient. The message from both the
new and previous CEO is unanimous; the government will ensure that fuel cost burdens must no longer be borne by
Tenaga for fear of power supply disruptions. Maintain OUTPERFORM with an
unchanged TP of RM7.50 based on an
average FY12-13E core EPS and target Fwd PER of 17.0x.
The new President/CEO is a home-grown breed, serving 33
years in Tenaga and was appointed to the Board of Directors in April 2010.
Dato’ Azman graduated with a Bachelor’s Degree in Engineering (Electrical) from
the University of Liverpool and holds an MBA from University Malaya. He started
his career in Tenaga back in 1979 and has seen served 33 years in the company.
His experience is extensive, with initial positions like District/Area Manager
and eventually climbing up the ladder to Vice President of Distribution and
subsequently, COO/Executive Director of Tenaga.
Moving towards Incentive Based Regulation (IBR). This is the first
mention of the terminology, although hints were offered back in 2010 (Pemandu’s
subsidy rationalisation plan). The general idea is to determine Tenaga’s
appropriate rate return (minimum IBR), particularly as it generates, own and
operates the nation’s power utilities assets.
This is similar to what was highlighted during the subsidy rationalisation
plan where ROA (operating cash flow level) must be at least equal or slightly
higher than Tenaga’s current WACC of 7%, which will help determine base tariff
adjustments and/or level of government compensations to Tenaga. This will help ensure Tenaga’s shareholders
are given a decent return while the public are not overcharged for
inefficiencies. However, implementation is pre-conditioned on the ‘fuel-cost-pass-through’
(FCPT) tariff mechanism, otherwise the minimum IBR would be meaningless.
Goal is to ensure
Tenaga’s sustainability. Dato’ Azman will be focusing on delivering the
goals of Gemilang 2015 (2011-15) which includes; 1) expanding works and
services related to the power sector and 2) creation of new revenue stream by leveraging
on Tenaga’s knowledge and competencies in the business. It appears the group
will be widening its overseas (e.g. MENA region) reach via REMACO (O&M services).
Since efficiency will be a key factor to drive the structural changes in the sector,
the group will also be moving towards compliance of PAS 55 (see below) which
has the same aim as International Standards Organization (ISO).
How confident are we
of a structural reform in the Power Sector? Very! Both the government and
Suruhanjaya Tenaga (ST) are on board in implementing a minimum IBR for Tenaga.
In fact, Tenaga is submitting its quarterly regulated cash flow workings for
the authorities to monitor. As it is, the FCPT tariff mechanism is also in
effect, although it is still subjected to the government’s political will.
However, one thing appears to be reinforced; the government recognises that
fuel cost burdens should be passed on to consumers and/or borne by the
government, as long as Tenaga remains efficient. Over the years, we have seen
Dato’ Sri Che Khalib and team pare down gearing levels sharply while key
operational indicators like UOR and SAIDI improve significantly. Although gas
shortage compensations will continue until Sept-2012, we believe the government
will compensate Tenaga when it off-takes gas supply from the Melaka
regassification plant at market prices (3x higher than current subsidised gas
price of RM13.70/mmBtu).
Source: Kenanga
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