Boon from low coal prices for TNB and others

by **Cals** Mon 15 Dec 2014, 07:44

Boon from low coal prices for TNB and others

Monday, 15 December 2014

PETALING JAYA: Power-generation companies, including Tenaga Nasional Bhd (TNB), are expected to enjoy an improved cost structure as coal prices have been down some 20% year-to-date, according to analysts.
1Malaysia Development Bhd (1MDB), which is listing its power-generation unit next year and Malakoff Corp Bhd are also expected to benefit from the low coal price regime.
TNB has been shifting its fuel mix from gas to coal which analysts said would benefit the company given the lower usage of the costlier liquefied natural gas (LNG) and that coal prices had fallen.
MIDF Research expected coal prices to remain soft going into 2015. It said coal prices had been on the down trend since the beginning of 2014 due to an oversupply in the global market in which demand was lower than production.
“Going into 2015, any improvements in coal price will depend largely on the recovery of China’s economy as it is the world’s largest importer of coal. However, we do not expect price recovery of coal to be happening in the near term. This is due to the overcapacity of China’s coal production resulting in an excess supply. Arising from this, we expect coal prices to remain soft in 2015,” MIDF Research said.
In the fourth quarter, TNB’s average gas volume has fallen some 13.4% to 1,217 units from 1,405 units in the third quarter. The average coal price in FY14 stood at US$75.40 (RM264) per tonne compared with US$83.60 a tonne in FY13.
About 50% of the unit generated (gwh) by TNB comes from coal, the bulk of which is imported mainly from Indonesia, Australia and South Africa.
Coal prices had hovered below US$70 per tonne in the last couple of months.
Analysts noted that TNB bought the bulk of its coal from Indonesia where the price could be slightly cheaper. A quick back-of-the-envelope calculation indicated that every one sen/kWh of lower fuel costs would boost TNB’s quarterly earnings by RM150mil.
However, some analysts observed that tariffs have a far larger impact on TNB’s core net profits rather than change in coal prices based on their sensitivity analysis.
At the moment, the regulated price of gas supplied by Petroliam Nasional Bhd is RM15.20 per mmbtu. Additionally, TNB has to purchase imported LNG, at reference cost at a tariff of RM41.68 per mmBTU when its consumption goes beyond 1,000 units a day. TNB uses about 1,300 units of gas per day.
Given the lower coal prices, MIDF said a lower power generation cost for the industry in 2015 and expects a higher utilisation of coal-fired power plants.
“This is due to the full recovery of the earlier affected coal-fired power plant namely, Jimah and Tanjung Bin as well as the future commissioning of the 1,000MW Manjung 4 coal-fired power plant. Also, it has been observed that daily average gas consumption has been declining as a result of higher utilisation of coal-fired power plant during the last quarter of 2014,” MIDF said.
Analysts said while electricity tariffs were not likely to be increased anytime soon, the low crude oil and coal prices provided TNB plenty of reasons to cheer.
“TNB is expected to make a bullet payment in US denominated debt next year. Lowering its borrowings now would pave the way for TNB to take on further leverage in future for projects such as the 1,000MW to 1,400MW in Pasir Gudang,” an analyst said.
AmResarch said following the Government’s decision, TNB would gain a one-off boost of RM1,148mil to its FY15 forecast pre-tax profit of RM848mil from the power purchase agreement savings and RM300mil attributed to savings from lower coal costs (assume at US$70 per tonne), which will be largely offset by higher LNG prices (assuming at RM47 per mmbtu). “This translates to a 16% upward earnings revision to our FY15 forecasts. Our estimates for FY16F-FY17F are maintained,” AmResearch said.
RHB Research raised TNB’s FY15 net profit forecast by 13% to factor in a lower coal cost assumption of US$75 per tonne (from US$92 per tonne) in view of the sharp decline in coal prices in recent months.
Analysts said although TNB had a good run this year, there were still upside potential with tariff revision as a re-rating catalyst.
Year-to-date, the utility giant’s share price has outperformed the benchmark FBM KLCI, making it one of the second most valuable companies by market capitalisation. At the close of RM13.74 last Friday, TNB has a market capitalisation of RM77.54bil.
MIDF expects the fuel cost pass-through mechanism to take place in June 2015 after a disappointing non-event in 2014.
“We opine that the mechanism will remain essential to reflect visibility of the players’ earnings as well as important for the sector’s reform.”
It believed that the potential listings of 1MDB’s power generation unit and Malakoff would result in a more positive investor sentiment on the sector and stocks. Listings of the companies are expected to take place in the first and second quarter of 2015 respectively.