Tenaga Nasional Bhd
(Jan 21, RM14.50)
Maintain buy with a target price (TP) of RM16: Responding to changes in the global economic landscape (lower crude oil price and the ringgit depreciation), Prime Minister Datuk Seri Najib Razak has announced a number of proactive measures to ensure Malaysia’s economy growth and development.

Key highlights are the postponement of the scheduled electricity tariff hike in 2015 and scheduled gas price hike for the industrial sector in 2015. The announced first measure is relatively in line with our expectation (refer to Power Industry Outlook 2015, dated Jan 6, 2015). 

Tenaga Nasional (TNB) is in an advantageous position to benefit from the improved fuel mix (improving coal power generation) and lower energy cost (coal, liquified natural gas [LNG], and alternatives) despite the depreciation of the ringgit in 2015. 

We have estimated TNB to enjoy net fuel cost savings of RM310 million in the first half of 2015 (1H15) and RM703 million in 2015 (assuming there is no change to piped gas prices).

Given that the announced postponement of gas price hike is only applicable to the industrial sector, we believe the power industry, that is TNB, may face the risk of a potential gas price hike in the upcoming June review. 

Nevertheless, we have estimated that the government has a leeway to increase the gas price by RM3 per mmbtu (currently RM15.20 per mmbtu) while maintaining the current tariff rate, implying TNB will pass back the initial fuel cost savings of RM310 million in 1H15 to the consumers in the 2H15.

Note that the government has previously agreed to compensate TNB RM848 million for cost under-recovery in 2014 (due to higher-than-expected fuel cost mix without tariff adjustment), indicating the government’s commitment to protecting TNB’s interest, in tandem with the incentive-based regulation’s (IBR) objective.

Risks are disruption in energy supply (coal and gas), government’s delay in tariff revision, unscheduled power-plant shutdowns, depreciation of the ringgit, and increased cost of energy fuel (coal, gas, LNG, and alternatives).

Forecasts remain unchanged.

Positives are the implementation of the IBR and fuel cost pass-through mechanism which eliminates uncertainties about future earnings, improved power generation from coal-fired power plants and low coal price environment.

Negatives are the decision on tariff revisions being dependent on the government and the depreciation of the ringgit against US dollar.

Maintain “buy” with an unchanged TP of RM16 based on discounted cash flow to equity. — Hong Leong Investment Bank, Jan 21

This article first appeared in The Edge Financial Daily, on January 22, 2015.