Tenaga Nasional Bhd
(Oct 27, RM13.06)
Maintain buy with target price of RM14: TNB will release its results for the fourth quarter ended August of financial year 2014 (4QFY14) on Oct 30.

We estimate core net profit at about RM1.5 billion, up 100% year-on-year (y-o-y), down 4% quarter-on-quarter (q-o-q) and 29% of our FY14 forecast.

This would take FY14 core net profit to RM5.45 billion, up 36% y-o-y, 5% higher than our forecast.

Generation for 4Q totalled 29,630 gigawatts per hour (GWh), up 4% y-o-y, up 1% q-o-q, with gas accounting for 49% and coal 46% of its fuel mix.

Gas consumed averaged 1,225 million standard cu ft per day (mmscfd), down 12% y-o-y, down 2% q-o-q, below the 1,300 mmscfd threshold.

TNB’s coal cost should again remain benign, with the Newcastle benchmark having averaged USD$70 per tonne in the quarter, down 12% y-o-y, down 5% q-o-q.

We have highlighted TNB’s more favourable 4Q fuel mix, with major coal plants having resumed operations.

In our view, this should more than offset cyclically higher expenses in fiscal 4Q and potentially higher taxes.

TNB is presently benefiting from the lack of a fuel-cost pass-through mechanism, thus earnings risk is skewed to the upside.

At the current run-rate, we estimate TNB would have clawed back its “higher-than-budgeted” first-half (1HFY14) liquefied natural gas (LNG) costs by October this year, thus negating the need for a tariff hike in the near future.

We value TNB using a discounted cash flow (DCF) methodology, assuming 7.2% weighted average cost of capital (WACC) and 1% long-term growth.

Our target price implies an FY15 price-to-book value of 1.9 times and price-earnings ratio of 14.8 times.

The availability of Peninsular Malaysia’s major coal-fired plants has trended up significantly since May 2014.

Coal-fired generation rose 22% q-o-q in 4QFY14, while coal’s proportion of total generation for the quarter was up 8 percentage points q-o-q (to 46%).

The consequences of higher coal-fired generation are two-pronged: (1) TNB’s usage of costlier LNG-sourced gas reduced, down 41% q-o-q; and (ii) TNB would have benefited more from falling coal prices (the Newcastle spot fell a further 5% q-o-q).

Despite the sharp sequential increase in coal-fired generation, we are only expecting 4QFY14 core net profit to be at around 3Q levels.

TNB usually incurs higher non-fuel costs in 4Q. In particular, general and other expenses have tended to spike in 4Q, possibly due to increased provisioning.

We do not rule out a sequential increase in taxes, as quarterly taxes are lumpy, and TNB’s year-to-date tax rate has been low (12% in the ninth month of FY14).

However, to put things in perspective, a repeat of 3QFY14-type profit in 4Q would already be more than credible in our view.

It would also mean TNB closes FY14 with record earnings. — Maybank Investment

This article first appeared in The Edge Financial Daily, on October 28, 2014.