Different views on cost-sharing impact

PETALING JAYA: Analysts are mixed on their views on the impact the newly-announced cost-sharing mechanism will have on Tenaga Nasional Bhd (TNB). On Thursday it was revealed that TNB, Petroliam Nasional Bhd (Petronas) and the Government would equally share the differential cost incurred by TNB due to the country's gas shortage, from Jan 1, 2010 until Oct 31, 2011 totalling RM3.07bil. TNB will now work with the relevant parties to execute the mechanism.

Some analsyts said the news only had a “neutral” impact on their views on TNB on the basis that the write-back had already been expected and the fact that the gas shortage problem continued to plague TNB. Other analysts have upgraded the utility giant to a “buy” call on the new development.

TNB had spent an additional RM2.1bil on fuel oil and distillates to generate electricity due to severe gas curtailment in the financial year ended Aug 31, 2011 (FY11).

TNB posted a net loss of RM453.9mil for the fourth quarter ended Aug 31 due to higher fuel costs, its second consecutive quarter of losses.

CIMB Research said compensation for the gas shortage was “good news” as TNB's financial position had deteriorated substantially. “But being an ad hoc payment rather than the proper cost pass-through mechanism that TNB needs, it leaves TNB vulnerable to future gas supply shocks,” it said, adding that it remained to be seen whether TNB would receive it in a single payment or in tranches.

While this is good news, CIMB Research said the development was “not a surprise” as the research house had already highlighted, in an earlier report on TNB, that the utility giant had submitted a letter to the Government requesting for compensation.

“TNB will be able to claw back RM2.046bil. We gather that TNB's RM4bil cash pile as at Aug 31, 2011 has been whittled down to RM1bil and the company is highly motivated to execute the mechanism immediately,” it said.

OSK Research said effectively Petronas and the Government would each pay one-third of the additional fuel cost amounting to RM3.1bil that TNB had to incur to generate power from oil and distillates.

“We are uncertain if this cost sharing extends forward, as we believe TNB would still have to generate power from alternative fuels up to January 2012. As the alternative fuel cost stood at RM2.6bil as of Aug 31, we believe TNB will write back two-thirds of this, or RM1.73bil in FY12.

“The remaining cost of RM313mil to be shared for FY12 should be accounted for in its usual quarterly results,” OSK said.

A more optimistic AmResearch maintained a “buy' call on TNB, with a higher discounted cash flow-derived (DCF) fair value of RM6.57 a share versus RM6.40 previously due to the higher-than-expected fuel sharing relief from the Government and Petronas.

“We maintain our core FY12 forecast earnings of RM2.88bil but have incorporated an additional RM1bil in exceptional fuel cost relief from the Government and Petronas. The additional FY12F earnings translate into a 17 sen a share increase in TNB's DCF to RM6.57 per share.”

While TNB's management did not expect Petronas to fully alleviate the natural gas shortage next year, AmResearch expects the supply to be 10% above the 950 million standard cu ft per day (mmscfd) registered in the second half of FY11.

MIDF Research viewed the development as “positive” for TNB with compensation of an estimated RM2bil or 36.6 sen per share between the Government and Petronas as well as all future costs related to any gas curtailment.

“With the fuel cost-sharing mechanism in place, TNB is now eased from the burden of high fuel costs. Therefore, we have adjusted upwards our FY12 forecast earnings by 10% to account for the fuel compensation,” it said.

Meanwhile, TNB rose to a high of RM5.81 in early trade but gave up its gains yesterday. The counter closed four sen lower at RM5.64.