TNB to see weaker 3Q earnings, say analysts

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KUALA LUMPUR (July 30): Analysts are anticipating that Malaysia’s electricity utility giant Tenaga Nasional Bhd (TNB) will see a weaker set of earnings in its third quarter ended May 31 (3QFY15) — mainly because they expect its earnings to have been dampened by the electricity tariff rebate that it granted to industrial consumers from March 1 to June 30.

TNB is set to release its financial results for its third quarter ended May 31, 2015 (3QFY15) later today, and analysts believe that the tariff rebate effects would result in a weaker 3QFY15 when compared with the preceding quarter, 2QFY15.

To recap, TNB had announced a rebate of 2.25sen/kWh from March 1 to June 30 for all its customers, except domestic ones, with monthly consumption of 300kWh and below.

The tariff rebate was given following RM727 million savings in generation costs for the Imbalance Cost Pass–Through period of January 2014 until December 2014.

The savings were mainly contributed by a reduction in the use of liquefied natural gas for electricity generation supported by the high performance of the coal power plants, as well as the downward trend of coal prices, TNB had said then.

Meanwhile, HLIB Research analyst Daniel Wong said today the rebate would be a drag to TNB’s 3QFY15 earnings.

“We expect TNB to recognise a tariff rebate of approximately RM500 million for the quarter, which would result in a weaker set of earnings as compared with 2QFY15,” he told theedgemarkets.com.

His view was echoed by an analyst from M&A Securities.

“Our house view is a slightly weaker results showing from TNB compared to 2QFY15, due to the rebate which most likely will decrease its earnings,” he told theedgemarkets.com.

In a note yesterday, AffinHwang Capital said it estimated TNB’s 3QFY15 core profit before tax (PBT), excluding tariff rebate and over-recovery of fuel costs, to grow higher quarter-on-quarter to RM1.85 billion–RM1.95 billion, based on an estimated 2QFY15 core PBT of RM1.81 billion.

“We believe a positive earnings surprise is unlikely due to tepid electricity demand growth in 3QFY15. We observe there is minimal use of oil and distillates, while liquefied natural gas (LNG) usage remains below the stipulated 1,350  million standard cubic feet per day (mmscfd) parameter.

“Unless there is a spike in opex (operating expenditure) or taxation, we believe negative earnings surprises are unlikely either,” said AffinHwang.

TNB’s share price has been on a downtrend since mid-June, when reports surfaced that it would be taking over debt-ridden 1Malaysia Development Bhd (1MDB)’s 70% stake in Jimah East Power Sdn Bhd.

Then on July 15, the utility giant announced that it had submitted an indicative non-binding proposal to acquire five domestic and eight international power assets from 1MDB’s wholly-owned unit Edra Global Energy Bhd.

TNB (fundamental: 1.3; valuation: 1.8) shares, which were trading at a five-year high of RM15.10 on Jan 23, was trading at RM12.14 as at 3.24pm — down 19.6%. Its market capitalisation was reduced by some RM16.71 billion to RM68.63 billion in that period.

“On a long-term basis, we are positive on the acquisition. But at present, it boils down to at what price TNB would pay for the acquisitions, it has to be value accretive,” said Wong.

In its note yesterday, AffinHwang said it maintained its “hold” call on TNB with with an unchanged 12-month target price of RM12 based on a 20% discount to its discounted cash flow based valuation of RM15.

“We believe the discount is justified to account for TNB’s potentially higher risk profile due to concerns over a possibly value-dilutive acquisition of Edra Global’s power assets,” said Affin Hwang.

(Note: The Edge Research's fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations.)