AmWatch - Tenaga Nasional : Lower fuel costs to boost earnings revision cycle BUY, 16 Jan 2015

STOCK FOCUS OF THE DAY

Tenaga Nasional : Lower fuel costs to boost earnings revision cycle          BUY

We reaffirm BUY on Tenaga Nasional with a higher fair value of RM16.30/share (vs. RM15.13/share previously) as we fine-tuned our WACC to 7.5%.Tenaga will be releasing its 1QFY15 results on 22 January. Operationally, there are unlikely to be any major surprises. We expect strong earnings for the quarter, underpinned by the tariff hike effective 1 Jan 2014 and fuel cost savings aided by continuing weakness in coal prices.

With the price of liquefied natural gas (LNG) remaining above the tariff threshold of RM41.68/mmbtu vs. RM58.33/mmbtu currently, we expect further cost under-recovery in 1QFY15. This is despite coal prices being lower at USD61.80/tonne vs. the tariff assumption of USD87.50/tonne (even after incorporating the higher USD:RM exchange rate). We are, however, not too concerned as the government had allowed Tenaga to utilise the savings from the reduction in capacity charge for Gen-1 PPAs to offset its cost under-recovery. The balance of PPA savings is ~RM170mil, after deducting ICPT costs needed to maintain the current tariffs.

Additionally, Tenaga’s gas usage is expected to continue its downward trend (4QFY14 QoQ: -13%), in line with the shift in its generation mix towards coal. Besides the recovery of the 2,100MW Tanjung Bin and 1,400MW Jimah East plants which experienced outages in 1HFY14, Tenaga can look forward to the coming on-stream of its own 1,000MW Manjung 4 power plant in April 2015.

Although the bi-annual tariff review will also adjust for any fuel cost differential when the FCPT mechanism kicks in, we note that the fuel mix remains a key earnings driver as its unit cost generation for coal is significantly lower than that of gas by 1.8x. We estimate that a USD10/tonne reduction in FY15F-FY17F coal costs could enhance Tenaga’s earnings for the period by 10%-12%. Electricity demand grew by 4.6% MoM in Sept 2014. We are keeping our FY15F growth assumption at 3%, which is slightly lower than consensus GDP growth forecast of 5%, in view of the uncertain economic outlook.

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