Tenaga Nasional - Proxy for stronger GDP growth

Proxy for stronger GDP growth
• 3QFY10 result was within expectation
• Demand growth and locked-in coal cost support stronger earnings
• Maintain Buy for attractive valuation and potential upside from tariff hike

Stronger 3Q on power demand growth. TNB’s 3Q revenue improved 10.3% y-o-y following 5.3% power demand growth supported by improvements at petrochemical and steel sectors. However, EBIT was flat due to a 12% rise in operating expenses as a result of higher offtake from coal fired plant, higher IPP payment (+6%), and RM63m provision in 3Q for general expenses. TNB recorded RM569m forex translation gain in 3Q as a result of a stronger ringgit against the US$ and Yen (+5%). Excluding the forex impact, 9M10 core net profit of RM2.1b is within our expectation, but at the lower end of market estimates.

Tariff hike is imminent, but timing uncertain. A tariff hike is imminent for TNB given higher coal costs and potential cuts in gas subsidy, but the timing is uncertain. Gas price to the power sector is currently subsidized at RM10.70/mmbtu (37% below current price of RM17/mmbtu); the government is looking at cutting this. We expect 2% net tariff hike to cater for higher capacity payment, an increase in gas cost to be fully passed-on, but coal cost will rise by 10% for FY11F due to limited supply. We estimate every 1ppt increase in gas cost will erode FY11F EPS by 1.6%, while a 1ppt increase in tariff will raise EPS by 9.1%.

Attractive valuation. Maintain Buy for TNB with a target price of RM10.80/share based on last 3-year average forward PE of 14x. TNB is trading at attractive 11x FY11F PE and 1.2x P/BV against its 10-year historical averages of 20x and 1.5x, and peers’ averages of 14x and 1.4x. Foreign shareholding in TNB has improved from 9.4% in Dec 09 to 10.7% in Jun 10.

Analyst
June Ng +603 2711 2222
june@hwangdbsvickers.com.my

From
HWANGDBS Vickers Research Sdn Bhd (128540 U)