Tenaga Nasional Bhd
(April 7, RM 14.56)
Maintain buy with target price (TP) of RM17.50: We believe Tenaga Nasional Bhd’s (TNB) second quarter ended Feb 28 of financial year 2015 (2QFY15) results may come in slightly above expectations, given the decent electricity demand growth and more importantly very minimal use of oil and distillates due to good hydropower output.

We estimate 2QFY15 core profit before tax (PBT) to grow at a mid-single-digit percentage point quarter-on-quarter (q-o-q) to RM2.45 billion to RM2.55 billion

We estimate 2QFY15 electricity unit sales may have increased only about 2% year-on-year (y-o-y). Nonetheless, we are still expecting fairly robust economic growth of 5% in 2015, and this suggests that electricity demand may pick up in the second half (2HFY15), given the strong correlation between electricity demand growth and economic growth.

TNB’s generation mix shifted substantially back to coal in 4QFY14 and we expect this positive trend to continue in 2QFY15 partly due to good hydropower output.

Risks include: 1) delay in implementing the fuel cost pass-through mechanism; 2) lower-than-expected electricity demand growth; 3) a rise in coal prices; 4) a weaker ringgit; and 5) disruption in the gas supply.

We maintain our buy rating on TNB with an unchanged discounted cash flow-based (weighted average cost of capital: 8%, long-term growth: 3%) 12-month target price of RM17.50. We still like TNB for: 1) its expected rebound in electricity sales growth; 2) benign coal prices; and 3) indirect fuel cost pass-through implementation. Our TP translates into a target FY16 estimated price earnings ratio of 13.4 times, which we deem relatively undemanding. — Affin Hwang Capital, April 6

This article first appeared in The Edge Financial Daily, on April 8, 2015.