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This article first appeared in The Edge Financial Daily, on May 6, 2016.

 

Tenaga Nasional Bhd
(May 5, RM14.10)

Maintain buy with an unchanged target price (TP) of RM16.36: We visited Tenaga Nasional Bhd’s (TNB) facilities in Manjung, Perak, comprising the Sultan Azlan Shah Power Station (Janamanjung Unit 4) and the Lekir Bulk Terminal (LBT).

To recap, Janamanjung Unit 4 is a coal-fired power plant with capacity of 1,010MW that was commissioned on April 14, 2015. The plant uses ultra-supercritical combustion technology, enabling it to achieve efficiency of up to 40% (conventional subcritical: 34% to 36%).

The Janamanjung coal power plant complex has a total capacity of 3,110MW (three times 700MW plus one times 1,010MW).

An upcoming ultracritical coal plant, Janamanjung 5 (capacity: 1,000MW), at the complex is slated for completion by October 2017.

As for the LBT, TNB took over ownership following its acquisition of a 97.5% stake in Integrax Bhd in April 2015. This bulk terminal is currently dedicated to the handling of TNB’s coal requirements for the Manjung complex.

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The key takeaway from the recent meeting was the impending expansion of the LBT by Integrax. Discussions are currently in the preliminary conceptual stage, specifically at the “price discovery” level.

Integrax is exploring the feasibility of building coal facilities on a vacant parcel of land adjacent to the LBT.

Options being considered include a combination of blending facilities, storage silos, new jetties or new coal yards.

Management alluded that expansion is essential to de-bottleneck the capacity of the LBT, which is currently running at close to full utilisation. Furthermore, new capacity would enable the LBT to cater for nationwide independent power producers and industries, thus not be limited to solely Manjung.

Management targets to obtain approval for its expansion proposal by year end. Thereafter, construction of the new facilities will likely take two to three years, completing by 2019 to 2020. In terms of costs, management expects to spend in the range of a few hundred million ringgit.

Management did not discount the possibility of selling and exporting coal to other countries after internal requirements are met. In this case, a new blending facility would add value to coal imported by Integrax and subsequently sold outside of Malaysia.

We maintain our forecasts and “buy” recommendation on TNB, with a TP of RM16.36 based on its discounted cash flow (weighted average cost of capital: 8.5%; terminal growth: 2%).

We believe TNB will likely increase its dividend payouts following its capital management study, which is targeted for completion by year end. This is on the back of its cash flow and earnings certainty following the implementation of the incentive-based regulation. On top of that, TNB’s robust balance sheet and stable earnings also render the stock attractive. — TA Securities, May 5

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