AmWatch - Tenaga Nasional : Lower coal costs fuel earnings revision cycle, 3 Nov 2014

STOCK FOCUS OF THE DAY

Tenaga Nasional : Lower coal costs fuel earnings revision cycle Buy

We maintain BUY on Tenaga Nasional (Tenaga) with an unchanged DCF-derived fair value of RM15.00/share, which implies an unchanged FY15F PE of 15x and a P/BV of 2.1x. We have fine-tuned our Tenaga’s FY15F-FY16F earnings but maintain our coal cost assumption of US$85/tonne even though prices are currently well below US$70/tonne, as the biannual tariff review will adjust for the fuel cost differential.

Our FY15F-FY17F electricity demand growth forecast is maintained at 3% on expectations of stronger economic growth, even though Tenaga had achieved a unit increase of only 2.5% in FY14. We introduce FY17F earnings with a 6% earnings growth, cruising on a steady 3% electricity demand growth.

Tenaga’s FY14 core pretax profit of RM6,319mil came in within our and street’s expectations. But Tenaga’s core net profit in comparison with street’s estimates are skewed by Tenaga’s prior year adjustments for reinvestment allowances of RM662mil for FY13-FY14. Tenaga declared a 4QFY14 dividend of 19 sen, which raised FY14 DPS by 4 sen to 29 sen, representing 58% of the group’s free cashflow.

The group’s 4QFY14 core pretax profit rose 19% to RM2,157mil largely due to lower fuel costs and a one-off reversal of provisions for Liberty Power. But Tenaga’s core net profit of RM1,203mil fell 23% QoQ largely due to a hefty effective tax rate of 46% (vs. only 13% in 3QFY14). Tenaga’s strong earnings are underpinned by the persistent weakness in coal prices which fell below US$70/tonne from US$72.90/tonne in 4MFY14. Management indicated that there remains a shortfall in the new tariff structure of up to RM600mil in FY14 due to the higher price of liquefied natural gas. If the regulatory bodies allow these additional costs to be recouped from higher tariffs or savings from the extensions of the first generation power plants, there will be an 8% boost to FY15F earnings.

Others :

CIMB Group : Unlikely changes of key merger values      Hold

Banking Sector : Industry LDR moves to a new recent peak          Neutral

Banking Sector : Foreign holdings in MGS broadly unchanged in September                                         Neutral

Banking Sector : Proposed changes in credit card fees    Neutral

QUICK TAKES

Hock Seng Lee :  Kuching centralised sewerage 2nd phase award early next year

                Buy

Felda Global : Acquires Felda IFFCO South China                Hold

Westports Holdings :  Khazanah exits      Hold

Plantation Sector : Newsflow for week 27-31 October    Neutral

NEWS HIGHLIGHTS

Malaysia Airports Holdings : Klia2 operating without final cert

Steel Sector : Remains competitive

DISCLAIMER:

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