Tenaga Nasional Bhd (TNB)
(Jan 9, RM14.16)
Maintain buy with a target price (TP) of RM16.50: We do not expect any negative surprises in Tenaga Nasional’s (TNB) first quarter financial year 2015 (1QFY15) earnings, as fuel costs should be well managed amid the stable gas supply.

Going forward, we expect electricity demand growth to rebound while earnings visibility should remain strong in FY15. Maintain “buy” with an unchanged TP of RM16.50.

We expect TNB’s 1QFY15 results (due on Jan 22, 2015) to be within expectations, given decent electricity demand growth and a stable gas supply.

With higher electricity unit sales growth, we estimate 1QFY15 core profit before tax (PBT) to grow at a low-to-mid single-digit quarter-on- quarter to RM1.6 billion to RM1.65 billion.

While electricity demand growth is not as strong as we had anticipated, we are nonetheless expecting a fairly robust economic growth of 5% in 2015. Electricity demand growth in September 2014 was relatively strong, but we estimate 1QFY15 electricity unit sales may have increased only 3% year-on-year.

While fluctuations in fuel costs should be covered under the imbalance cost pass through (ICPT) mechanism, we are positive that TNB’s fuel costs remain under control in 1QFY15.

TNB’s generation mix shifted back to coal in the 4QFY14, and we expect this to have continued in 1QFY15.

The US dollar-denominated coal costs should inch lower as prices have fallen by 9.2% to US$66 (RM235) per tonne (4QFY14: US$73 per tonne) while the ringgit was only weaker marginally by 2.6% to RM3.27 per US$ (4QFY14: RM3.19 per US$).

Risks include delay in implementing the fuel cost pass through mechanism, lower-than-expected electricity demand growth, a rise in coal prices, a weaker ringgit and disruption in gas supply.

We maintain our “buy” on TNB with an unchanged discounted cash flow-based (weighted average cost of capita: 8%, long-term growth: 3%) 12-month TP of RM16.50.

Given its resilient business model and robust cash flows, we like TNB as a key proxy to the Kuala Lumpur Composite Index and domestic economic growth.

A longer-term catalyst would be the automatic implementation of the ICPT mechanism, which would give TNB strong earnings visibility by being insulated from fluctuations in fuel costs. — Affin Hwang Investment Bank Bhd, Jan 9.

This article first appeared in The Edge Financial Daily, on January 12, 2015.