Tenaga Nasional Bhd (TNB) (Oct 14, RM12.50)
Maintain hold with target price of RM12.56: Based on data from the Energy Commission (EC), we gather that TNB’s fourth quarter financial year 2014’s earnings likely improved both quarter-on-quarter and year-on-year given that it used less gas and distillates during the quarter. This implies that its coal utilisation has normalised, allowing it to take advantage of the current low coal prices. However, while we are positive on Tenaga’s 4QFY14 earnings, we believe that this has been priced in by the market at its current valuations of 11-12x FY15 price-earnings.
Throughout the whole quarter, gas utilisation was approximately 1,230mmscfd, which is 10-11% lower than the 3QFY14 gas utilisation of 1,378mmscfd. The higher utilisation of coal, coupled with the current low prices of coal, probably boosted TNB’s earnings in the 4QFY14.
Given TNB’s positive earnings outlook for 4QFY14, we believe that a tariff hike in the near term is unlikely. We think that an announcement of a tariff hike by the government will likely bring Tenaga’s improved earnings for 4QFY14 into the spotlight, prompting various parties to argue that a tariff hike is not needed and will only burden consumers. While the current fuel cost situation does give TNB a positive near-term outlook, we remain cautious as we maintain our view that a fuel cost pass-through (FCPT) mechanism needs to be implemented to secure its longer-term earnings.
We think that TNB’s current valuations, i.e. 11x to12x FY15 earnings, have priced in most of the positive near-term earnings potential for the company, underpinned by the higher coal utilisation and lower coal prices. However, while we believe that Tenaga should trade higher, i.e. closer to the market price-earnings ratio of 15x to 16x, we think the FCPT mechanism has to be in place to assure investors of greater long-term earnings visibility. — CIMB Research
This article first appeared in The Edge Financial Daily, on October 15, 2014.