No shock for Tenaga stock

NEWS that Tenaga Nasional Bhd (TNB) will be party to a fuel cost-sharing mechanism failed to boost the stock yesterday despite an early surge in morning trade.

The utility company's stock fell 4 sen or 0.7 per cent yesterday to close at RM5.64 with just over eight million shares changing hands.

In the first hour of trade, TNB advanced 1.23 per cent or 7 sen to RM5.75 following approval for a fuel cost-sharing mechanism.

However, analysts are upbeat on the announcement made late Thursday with many recommending a "buy" call.

The mechanism will see TNB, the government and Petronas equally sharing the RM3.1 billion in costs incurred since January and October this year.

"We view this development as positive for TNB with compensation of an estimated RM2 billion or 36.6 sen per share between the government and Petronas as well as all future costs related to any gas curtailment," said MIDF Research in its report yesterday.

It believes that with the mechanism in place, TNB is now eased from the burden of high fuel costs.

"Therefore, we have adjusted upwards our earnings forecast for financial year ending August 30, 2012 by 10 per cent to account for the fuel compensation," it said.

Based on the earnings adjustment, MIDF revised its target price for TNB to RM6.70 from RM6.00 previously and upgraded its recommendation from "neutral" to "buy".

According to Maybank Investment Bank, Thursday's news "is a game changer" as TNB needs some form of balance sheet resuscitation. It only has RM4 billion of cash as at the financial year ended August 30, 2011.

This resolution will improve TNB's debt outlook and keep intact its sacred AAA rating.

"TNB's outlook has improved materially on both accounts of profitability and balance sheet," it noted.

The research firm added that things could look brighter with a possible tariff hike this month or in January next year. It could also enjoy substantial savings in the cost of coal if prices continue to fall.

"We have raised our financial year ending August 2012 to 2014 earnings by 17.4 per cent, 7.3 per cent and 2.7 per cent respectively, thanks to lower fuel cost bill," it said.

Maybank IB upgraded the stock to "buy" from "hold" on the higher earnings outlook and better balance sheet health with a new target price of RM6.90.

Meanwhile, OSK Research said the long-term uncertainties in the electricity sector prompted it to keep its "neutral" call.

OSK was uncertain if the cost-sharing extends forward as it believes TNB would still have to generate power from alternative fuels up to January next year.

"As the alternative fuel cost stood at RM2.6 billion as of end-August 2011, we believe TNB will write back two-thirds of this, or RM1.73 billion, in the 2012 fiscal year. The remaining cost of RM313 million to be shared for in 2012 should be accounted for in its usual quarterly results," it said.

OSK also noted that TNB will have to fork out RM194 million in losing a court case, including interest.