Lack of fresh catalysts for Tenaga Nasional

KUALA LUMPUR: Public Invest Research is maintaining its Neutral outlook on Tenaga Nasional with an unchanged target price of RM12.32.

It said on Wednesday the power giant's share price stock was fully valued at 15.0 times FY14 price-to-earnings ratio (PER).

"Gains in operating profit due to the tariff hike will be limited by the reduced usage of coal and higher gas cost.

"There will also be a lack of catalysts for Tenaga going forward as most capacity plant-ups and reform initiatives have been rolled out, what remains to be seen is the government's execution power," it said.

Public Invest Research said it met up with the management recently for updates regarding the power sector.

The research house said due to the gas curtailment in 2011, gas-based generation fell below 50% from a high of 65% in 2009, matched by a corresponding increase in coal-based generation and the burning of oil and distillates.

Due to the improvement in gas supply in mid-2013 and unscheduled outages at Tanjung Bin and Jimah, gas-based generation rose to a high of 58% in January 2014.

"We expect gas-based generation will continue to dominate as one of the units in Manjung coal power station is due to shut down for scheduled maintenance once other coal-fired plants are operating normally," it said.

Public Invest Research added there was also the risk of unscheduled outages at other coal-powered units due to the wear and tear of heavy coal usage in the past two years, which may lead to higher gas usage as substitute. It expected this would limit profitability from the tariff hike as the age of cheap gas is over.

"We estimate gas cost per kWh generated will increase 54% to 20 sen/kWh in FY14, assuming RM43/mmBtu for liquefied natural gas," it said.

The research house also pointed out the group enjoyed RM390mil tax credits in its Q1, FY14 ended Nov 30, 2013. Of this sum, RM189mil was due to reversal of deferred tax while RM202mil was reinvestment allowance incentives.

"We understand that the latter was due to an application submitted by the group four years ago for government consideration of its eligibility to receive investment tax allowance for its capital expenditures under approved services projects.

"The amount awarded was based on qualifying capital expenditure from 2006-2008, while the investment allowance from 2009 onwards is still subject to approval.

"We estimate it could result in gains of RM50mil per annum if approved. However, we are not accounting for future tax incentives in our forecast as the timing and outcome of future approvals are unknown," it said.

Public Invest Research said the six-monthly tariff review remained an uncertainty. While the incentive based regulation (IBR) stipulates a tariff revision every six months in tandem with the adjustment in gas prices, both the Electricity Commission and Tenaga acknowledge that it is not set in stone, as the final decision still lies with the Cabinet.

"The tariff revision in December was a bold first step into the IBR regime, but the resulting outcry may deter further action in the short space of six months, especially as the cost of living escalates with various subsidy rollbacks.

"As such, the group may not be completely shielded from fuel cost risk yet, so long as the fuel-cost-pass-through mechanism is not automated. That said, we believe the risk of escalating fuel costs is low at the moment as industrial activity slows especially in China," it said.