Tenaga Nasional’s (TNB) 1QFY13 core earnings of RM1.02bn beat our and consensus’ forecasts, representing 31.1% and 31.5% of the respective full-year estimates, buoyed by favourable coal prices. As we are revamping our model following a reallocation of our internal resources, we upgrade our earnings forecasts by 0.1%-9.7% for the next three FYs. Maintain BUY, with our FV revised to RM8.41, pegged at a lower FY13 PER of 13x vs 15x previously.
A sterling start. TNB’s 1QFY13 revenue rose more than 5.0% y-o-y to RM9.13bn, driven mainly by higher consumption in the commercial and domestic sectors. Meanwhile, operating expenses shrank 5.0% y-o-y and 8.9% q-o-q due to favourable coal prices averaging RM259 per tonne during the quarter as international prices of the commodity in USD terms continued to slip due to oversupply concerns. This gave rise to more than RM500.2m in cost savings y-o-y and RM326.0m q-o-q vs 4QFY12. Overall, TNB’s 1QFY13 core earnings of RM1.02bn were more than 100% higher y-o-y and up by a commendable 9.7% q-o-q even though 1Q was a seasonally weaker quarter.
Other highlights. At an analyst briefing following the release of its results, TNB’s management said it still believes that coal prices are likely to hover between the current level and USD100 per tonne for the rest of 2013. This jives with our coal price assumption of USD95 per tonne for FY13 and USD100 for both FY14 and FY15. Meanwhile, TNB has submitted its bid for a 1,000MW coal-fired power plant scheduled for commissioning in Oct 2017 and intends to participate in the tender for the other 2x1000MW coal-fired plant.
Maintain BUY. Following an internal coverage revamp, we have revisited our model and revised some assumptions. This leads to upgrades in our core earnings forecasts by 9.7% for FY13, 5.7% for FY14 and 0.1% for FY15. As the key factors of coal prices and weakening USD continue to favour TNB, we believe it would register strong results in 2QFY13 as well. That said, we are lowering our FV to RM8.41 as we tweak our FY13 PER to 13x to place it in line with its historical average, as well as incorporate potential general election risks. Given the substantial upside of more than 20%, we maintain our BUY call.
A sterling start. TNB’s 1QFY13 revenue rose more than 5.0% y-o-y to RM9.13bn, driven mainly by higher consumption in the commercial and domestic sectors. Meanwhile, operating expenses shrank 5.0% y-o-y and 8.9% q-o-q due to favourable coal prices averaging RM259 per tonne during the quarter as international prices of the commodity in USD terms continued to slip due to oversupply concerns. This gave rise to more than RM500.2m in cost savings y-o-y and RM326.0m q-o-q vs 4QFY12. Overall, TNB’s 1QFY13 core earnings of RM1.02bn were more than 100% higher y-o-y and up by a commendable 9.7% q-o-q even though 1Q was a seasonally weaker quarter.
Other highlights. At an analyst briefing following the release of its results, TNB’s management said it still believes that coal prices are likely to hover between the current level and USD100 per tonne for the rest of 2013. This jives with our coal price assumption of USD95 per tonne for FY13 and USD100 for both FY14 and FY15. Meanwhile, TNB has submitted its bid for a 1,000MW coal-fired power plant scheduled for commissioning in Oct 2017 and intends to participate in the tender for the other 2x1000MW coal-fired plant.
Maintain BUY. Following an internal coverage revamp, we have revisited our model and revised some assumptions. This leads to upgrades in our core earnings forecasts by 9.7% for FY13, 5.7% for FY14 and 0.1% for FY15. As the key factors of coal prices and weakening USD continue to favour TNB, we believe it would register strong results in 2QFY13 as well. That said, we are lowering our FV to RM8.41 as we tweak our FY13 PER to 13x to place it in line with its historical average, as well as incorporate potential general election risks. Given the substantial upside of more than 20%, we maintain our BUY call.
HIGHLIGHTS
Higher electricity sales. TNB reported 1QFY13 revenue of RM9,130.8m, down by 2.2% q-o-q owing to seasonality, but up by over 5.0% y-o-y driven both by higher electricity consumption as well as higher revenue per unit sold in the Peninsular. In particular, consumption in both the commercial and domestic sectors witnessed a sturdy expansion of 5.0% and 6.1% y-o-y respectively in 1QFY13. This positive impact further spilled over to higher revenue per unit sold, given that TNB’s commercial customers typically pay higher tariffs, and hence helped to amplify topline growth. Going forward, management believes that higher domestic demand as well as increased capital spending would continue to spur power consumption. Its FY13 target demand growth of 3.5% is in line with our estimates.
Favourable coal prices. Meanwhile, the group’s operating expenses declined by a significant 5.0% y-o-y and 8.9% q-o-q. We attribute this to favourable coal costs during the quarter, at an average of RM259/mt (-24.4% y-o-y; -11.1% q-o-q) as international coal prices continued its downtrend on oversupply fears, coupled with the weaker greenback against the RM during the period. These two factors alone contributed to costs savings of over RM500.2m on a y-o-y basis and RM326.0m against 4QFY12. As a result, TNB’s 1QFY13 costs per unit improved 14.9% y-o-y and 6.4% q-o-q to 28.6 sen.
Strong start to FY13. Consequently, TNB’s EBITDA improved 35.3% y-o-y to RM2,829.2m, with a corresponding 700 bps hike in its margin to 31.0%. All in, 1QFY13 net profit surged by over 100% y-o-y and 40.4% q-o-q to RM1,415.5m. Stripping off the RM399.8m forex gains on its foreign borrowings due to the weaker USD and JPY against the RM, TNB posted core earnings of RM1,015.7m, up by more than 100% y-o-y and a commendable 9.7% q-o-q despite 1Q being a weaker quarter seasonally.
New accounting standard dragged down NTA/share. On a side note, we noticed that TNB registered a liability of RM3,223.9m as employee benefit reserve during the quarter following its adoption of MFRS119. Under the new accounting standard, the present value of its retirement benefits as well as post-retirement medical coverage would have to be recognized upfront under other comprehensive income, with a revaluation taking place every three years. While this dragged down its NTA per share by some RM0.58, or by 9.6%, we are fairly neutral to slightly positive on this as it is more reflective of TNB’s future liabilities based on actuarial assumptions. And as these recognitions would bypass its income statement, they have minimal impact on our earnings forecasts.
Melaka regasification terminal by mid-2013. During its analysts’ briefing, management highlighted that the Liquefied Natural Gas (LNG) regasification terminal in Sungai Udang, Melaka would likely be commissioned by the middle of this year. While sources indicated that PETRONAS would likely only sell the LNG produced at market prices, we continue to believe that there is a possibility of the Government stepping in by compensating TNB in order to cover for the additional fuel costs incurred. This, in our view, is the most viable option at this juncture for both TNB and the existing Government until a proper fuel costs pass through formula is in place, which we believe would only be likely after the 13th General Election.
Coal prices to remain stable. Management continues to believe that coal prices would likely hover between the current level of around USD90/mt and USD100/mt for the rest of the year due to the abundant supply. This jives with our assumption of an average coal cost of USD95/mt for FY13 and USD100/mt for both FY14 and FY15. TNB current sources 70% of its coal from Indonesia and the remainder from Australia and South Africa.
Bidding for 3,000MW capacity expansion. On its ongoing capacity expansion, we understand that works at its proposed Janamanjung expansion as well as its new hydro plants in Hulu Terengganu and Ulu Jerai are largely on track. Management also indicated that TNB has placed a bid for a 1,000MW coal-fired power plant scheduled for commission in Oct 2017 and that it would likely to also participate in the tender for another 2x1000MW coal-fired plant, which is targeted to be operational by 1Q2019. Although the fact that TNB is bidding for these plants is not exactly new, we are glad to know that the group is proactively looking to expand its own generation capacity after having recently won the bid for the RM2.5bn 2x535MW gas-fired plant in Prai, Pulau Pinang in Oct 2012. Management reaffirmed TNB’s capex allocation of RM9.7bn over the next five years to construct new power plants.
First generation PPAs to be finalized. On the ongoing renewal of the first generation power purchase agreements (PPAs), TNB confirmed that letters of invitation have been issued by the Energy Commission to 1Malaysia Development Bhd (1MDB)’s Genting Sanyen Power, Malakoff’s Segari Energy Ventures as well as its own TNB Pasir Gudang Energy. Negotiations would likely commence soon and we believe it is just a matter of time for the official finalization of the agreements.
Maintain BUY. Following our internal coverage restructuring, we are revamping our TNB model and revisiting some of our core assumptions. Correspondingly, we are upgrading our core earnings forecasts by 9.7% for FY13, 5.7% for FY14 and 0.1% for FY15. With the key factors of coal prices and forex remaining in TNB’s favour – coal prices at approximately USD90/mt and the USD at RM3.04 currently – we believe the company would likely register another strong set of results in 2QFY13. Having said that, we are lowering our FV from RM8.90 to RM8.41 as we tweak our FY13 PER to 13x (from 15x previously) to be in line with its historical average as well as taking into account potential election risks. Nonetheless, given the substantial upside of over 20%, we are maintaining our BUY call.
First generation PPAs to be finalized. On the ongoing renewal of the first generation power purchase agreements (PPAs), TNB confirmed that letters of invitation have been issued by the Energy Commission to 1Malaysia Development Bhd (1MDB)’s Genting Sanyen Power, Malakoff’s Segari Energy Ventures as well as its own TNB Pasir Gudang Energy. Negotiations would likely commence soon and we believe it is just a matter of time for the official finalization of the agreements.
Maintain BUY. Following our internal coverage restructuring, we are revamping our TNB model and revisiting some of our core assumptions. Correspondingly, we are upgrading our core earnings forecasts by 9.7% for FY13, 5.7% for FY14 and 0.1% for FY15. With the key factors of coal prices and forex remaining in TNB’s favour – coal prices at approximately USD90/mt and the USD at RM3.04 currently – we believe the company would likely register another strong set of results in 2QFY13. Having said that, we are lowering our FV from RM8.90 to RM8.41 as we tweak our FY13 PER to 13x (from 15x previously) to be in line with its historical average as well as taking into account potential election risks. Nonetheless, given the substantial upside of over 20%, we are maintaining our BUY call.
Source: OSK
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