OSK Research has raised Tenaga Nasional Bhd (TNB) to a buy at RM8.18, as the research house believes that the national utility is cheap enough with the potential for a tariff hike in January 2010. It also upped the fair value of the stock to RM9.38 from RM9.
“Although TNB has underperformed the index after releasing a poor set of 3QFY09 results in July, we expect some selling pressure after the national utility company announces potentially lacklustre 4Q numbers in October. This would, however, present an excellent opportunity to accumulate the shares on weakness,” it said.
“The PM’s recent announcement that the somewhat controversial coal- fired 300MW Lahad Datu power plant would now be built in Felda Sahabat, some 100km from Lahad Datu, seems to indicate that the federal government is prepared to make some tough decisions in order to ensure stable and sufficient electricity supply. We take this to mean that TNB may see more support for its efforts in pushing for a tariff hike or a fuel pass-through mechanism,” it added.OSK Research noted that although electricity demand has picked up, with Peninsular Malaysia’s demand between May and July growing 12.4% compared with the preceding three months, the additional electricity was likely to have been generated by coal-fired power plants, particularly coal independent power producers (IPPs).
“Aside from the pallid core profit margins, the weakening of the ringgit against the yen in 4QFY09 should see TNB chalk up some RM255 million in translation losses,” it added.
With the previous gas price review on July 1 turning out to be a non-event, the upcoming gas price review in January 2010 is overdue. “We think the government may raise the price of gas with an associated electricity tariff hike to ensure a continued reduction of subsidies although we are currently unable to make an estimate of the quantum of increase,” it said.
“Nonetheless, the possibility of further tariff hikes in the future prompts us to revise upwards our DCF (discounted cash flow) terminal growth rate from 1.5% to 2.2%. Our DCF-based fair value is accordingly raised to RM9.38. We advise investors to accumulate on weakness ahead of a potential tariff hike in January 2010,” it said.
TNB rose three sen to close at RM8.21 yesterday.
This article appeared in The Edge Financial Daily, September 30, 2009.