Affin Research maintains Reduce on Tenaga, TP RM6.60 (5347)

KUALA LUMPUR: Affin
Investment Research reiterated its REDUCE rating on Tenaga with an
unchanged discounted cashflow-based (DCF) target price of RM6.60 a
share, based on a 15% discount to our DCF value of RM7.78/share
(discount rate 7.5%; growth rate 3.0%).
The research house said
on Wednesday it continues to apply a 15% discount in arriving at our
fair value for Tenaga to factor the inherent earnings vulnerability
given the mismatch between revenue (regulated tariff) and cost
(fluctuation in coal and soon, LNG market prices).
“For a
sustained re-rating, we opine Tenaga (and the Government) must show
commitment in upholding the fuel-cost-pass-through mechanism. This will
allow further share price discovery and re-rate the stock closer to our
DCF valuation of RM7.78 a share. Foreign shareholding as at June 2012
stands at 11.9% (high of 25.7% in August 2007),” it said.
Affin
Research said the stock has outperformed the broader market by 8% YTD
as alternative fuel compensation and easing coal prices (-21%
year-to-date) underpinned earnings recovery.
“And as earnings
visibility improved, Tenaga's cashflow prowess prompts us to re-examine
upside in terms of dividend potential. Based on our earnings
simulation, blue-sky scenario suggests that FY13's dividend yields
could touch 6% if we were to assume: (1) continuously depressed coal
prices of US$80 a tonne; (2) Tenaga to remain neutral as the Government
or consumers absorb the LNG costs (amounting to RM1.7bil annually, or
5% tariff hike); and (3) a higher dividend payout policy (of 85% of
company FCF),” it said.
The research house said at this juncture, the company continues to adhere to a 60% FCF dividend payout ratio.
“We
opine a substantially lowered net gearing levels (34% by FY13) versus
five years ago (FY08: 68%) could provide flexibility in returning a
higher portion of profits to shareholders.
“That said, this
scenario remains very much our conjecture and may only materialise as a
longer-term re-rating catalyst for the stock if the Government allows
for unregulated tariffs -- thereby allowing Tenaga to behave like a
high dividend yielding concession,” it said.