Tenaga Nasional Bhd
(June 21, RM6.57)

Mantain buy at RM6.55 with a target price of RM7.40: Coal prices have retreated by over 20% in the past three months in tandem with the global commodity selloff.

This is beneficial for TNB as coal is its single largest cost component (about 21% of total cost). Every US$1 per tonne decrease in average coal prices for FY12 ending Aug 31 will boost earnings by RM47 million or +1.8% from our base forecast profit.

There is significant scope for earnings upgrades if the current situation persists. Maintain “buy”, with an unchanged target price of RM7.40 based on a FY13 price-earnings ratio of 13 times, in line with its historical average PER.

Coal prices are currently US$83.75 (RM265.50) per tonne, a steep decline from the 2011 peak of US$139 per tonne and this year’s high of US$119 in February (-25% YTD).

The growing economic uncertainty in the eurozone, coupled with a slower global growth outlook, has caused a selloff in commodities. This presents TNB with the opportunity to procure coal at lower cost and expand its hedges; currently only 6% of TNB’s coal requirements are contracted at fixed prices.

Every US$1 per tonne decline in the average cost of  TNB’s coal boosts our base FY12 earnings forecast by RM47.3 million (+2%). The FY12 YTD average coal price is US$109.8 per tonne. Assuming prices stay at current levels, FY12 coal costs will average out at US$104.3 per tonne, 2.7% below our assumption of US$107.2 per tonne. This would raise our FY12 earnings estimates by 5.7%, to RM2,535 million.

TNB’s natural gas supply is expected to be 1,100 mmscfd to 1,150 mmscfd, which is sufficient and does not warrant significant consumption of alternative fuels. Malaysia received higher than average rainfall in the recent quarter based on data from the meteorological department; this should enable TNB to churn more power from its hydroelectric dams.

We keep our earnings forecasts and target price unchanged for now, with an upward bias. The key catalyst is whether coal prices will sustain or continue their downward trend, and whether TNB has taken this opportunity to hedge more of its coal requirements. — Maybank IB Research, June 21

This article appeared in The Edge Financial Daily on June 22, 2012.