TNB receives tax allowance windfall

TNB receives tax allowance windfall
Business & Markets 2014
Written by PublicInvest Research
Thursday, 20 February 2014 11:17

Tenaga Nasional Bhd
(Feb 19, RM12.10)
Maintain neutral at RM11.50, with a target price of RM12.32: In the wake of the gas curtailment in 2011, TNB’s gas-based power generation dropped below 50% from a high of 65% in 2009, matched by a corresponding increase in coal-based power generation and the burning of oil and distillates.

Due to the improvement in gas supply in mid-2013 and unscheduled outages at the Tanjung Bin and Jimah power stations, gas-based generation climbed to a high of 58% in January this year.

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

This would limit profitability from the tariff hike in our view, as the age of cheap gas is over. We estimate that gas cost per kilowatt-hour (kWh) generated will increase 54% to 20 sen per kWh in financial year 2014 ending August (FY14), assuming RM43 per million British thermal units for liquefied natural gas (LNG).

Recall that TNB enjoyed RM390 million tax credits in its first quarter ended November 2013. Of this sum, RM189 million was due to reversal of deferred tax while RM202 million was attributed to reinvestment allowance incentives.

We understand that the latter was due to an application the group had submitted to the government four years ago to consider its eligibility to receive investment tax allowance for its capital expenditure under approved services projects.

The amount awarded was based on qualifying capital expenditure from 2006 to 2008, while the investment allowance from 2009 onwards is still subject to approval. We estimate it could result in gains of about RM50 million per annum if approved.Maintain “neutral” with unchanged target price of RM12.32, as we believe the stock is fully valued at 15 times FY14 price-earnings ratio. — PublicInvest Research, Feb 19




This article first appeared in The Edge Financial Daily, on February 20, 2014.