Tariff hike to drive TNB’s earnings revision cycle

by **Cals** Mon 06 Jan 2014, 14:48

Business & Markets 2013

Written by AmResearch

Monday, 06 January 2014 10:46

Tenaga Nasional Bhd
(Jan 3, RM11.00)
Maintain buy at RM11.18 with a revised target price of RM14.90 (from RM13.10): We maintain our “buy” call on TNB with a higher discounted cash flow-derived fair value of RM14.90 per share (versus RM13.10 earlier), which implies a calendar year 2014 (CY14) price-earnings ratio (PER) of 16 times and price-to-book value (P/BV) of 2.4 times.

We have fine-tuned TNB’s financial year 2014 ending Aug 31 (FY14) to FY16F earnings by 3% to 5% largely due to adjustments in our assumptions for the group’s capacity charge payments to independent power producers.

The savings from the reduction in capacity charge since March 1, 2013 for the first generation power purchase agreements, which have been extended by another 10 years, will be kept in a special account, which is at the disposal of the Energy Commission. It is uncertain at this stage what the funds will be used for, but we think it will likely still be used as part of an earlier proposed fuel stabilisation fund, as the government has proposed for fuel subsidies to be reduced biannually.

Note that our forecasts have already incorporated the group’s net tariff increase of 3%, arising from the hikes in electricity and natural gas prices. The net increase stems from the 2.7% increase from base tariff plus another 0.5% from the higher US$87.5 (RM288) per tonne (+3%) coal price embedded in the new tariff structure.

TNB’s valuation kicker stems from the recent electricity tariff hike of 14.9% for Peninsular Malaysia and 16.9% for Sabah, effective Jan 1 this year, which will drive its earnings revision cycle over the coming quarters.

We also expect the competitive bidding process to build new power plants to drive down the group’s prospective cost structure together with the implementation of the ongoing incentive-based regulatory measures.

The earnings revision cycle from the tariff hike, commencing next month, will continue to propel the rerating focus for the group. The stock trades at a decent P/BV of 1.8 times, which is at the mid-range of adjusted 1.1 times to 2.7 times over the past five years. TNB also offers a fair CY14F PER of 12 times, compared with the stock’s three-year average band of 10 times to 16 times.

While foreign shareholding has risen to 27% currently versus its peak of 28% back in April 2007, this is not a concern as presently there is no limitation on foreign shareholding levels. — AmResearch, Jan 3

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This article first appeared in The Edge Financial Daily, on January 06, 2014.