Friday, July 15, 2011

ECM Libra Research expects Tenaga 3Q results to be weak

KUALA LUMPUR: ECM Libra Research expects TENAGA NASIONAL BHD [] (TNB) to report weak results for its 3QFY11 results. The results are due on July 21.

'We expect the results to be weak, as the company had earlier issued a profit warning during the 2QFY11 results conference call.

'Weak results will mainly be attributed to gas shortages leading to TNB burning more alternative fuels such as coal, oil, distillate and even resorting to importing electricity from Power Seraya, Singapore,' it said.

ECM Libra Research said unfortunately, this gas shortage problem coincided with seasonally strong demand in April and May, which further adds to TNB's fuel costs, as it burns more alternative fuel to meet the strong seasonal demand.

'Over a 12-months horizon, we are still positive on TNB's fundamentals. Hence, any short-term price weakness arising from the weak 3QFY11 results will be a good opportunity to accumulate,' it said.

It said the gas curtailment problem should be over, after the last of three scheduled maintenance work by Petronas is completed by end-June. From July onwards, it will be business as usual for TNB as gas supply to the power sector should recover to the usual 1,150 mmscfd.

The government has set-up a new special-purpose unit called MyPower Corp to review the power purchase agreements (PPAs) between TNB and the IPPs.

'We view the setting up of this special-purpose unit positively, as it signals that the IPP re-negotiation is gaining momentum.

Investment merits are:

A big-cap, index-linked stock trading at a discount to market P/E multiple.

Beneficiary of improving regulatory environment for the power sector.

Re-rating catalysts:

Successful pass-through of higher coal costs in the next tariff review in Dec 2011.

Favourable outcome from power purchase agreements re-negotiation with the independent power producers (IPP) leading to lower future capacity payments (CP).

Key risks:

Continued appreciation in coal prices resulting in higher fuel costs. TNB's current tariffs are only covered up to USD85/MT, compared to market price of about US$120 a tonne.

Longer-than-expected gas curtailment from Petronas.


Maintain BUY on TNB with a target price of RM7.84, based on unchanged P/E multiple of 15x on CY11 EPS.

No comments:

Post a Comment