Tenaga Nasional 1QFY09: Weaker demand growth

January 21, 2009 at 12:16 am 1 comment

• Key highlights
Tenaga felt the impact of lower demand, higher fuel cost and a weakening RM, resulting in weaker bottomline. The group recorded a 1.1% increase in y-o-y demand for 1QFY09. Demand has subsequently fallen 2.8% in November 08 and 3.0% in December 08 however, and could continue for a while yet.
• Result analysis
The group recorded a foreign currency translation loss of RM1.4bn this quarter, which resulted in the group recording a loss of RM940.7m this quarter as opposed to a profit of RM1.5bn in 1QFY08.
• Challenging year ahead for TNB
There are very few catalyst to spur an increase in demand going forward, considering that the industrial sector (which includes cement and steel industries), is not expected to pick up its pace until July 2009. Until then, there is a potential of this sector recording a contraction or at best flat demand. This does not bode well for TNB as the industrial and commercial sectors account for about 77% of electricity consumption in the country.
On the cost side, coal prices are expected to average at US$95/MT for 2009. However any savings here would be offset by higher capacity payments as Jimah power plant came on stream this month. Meanwhile, there have been calls by consumers to reduce electricity tariffs in line with the fall in the price of oil. TNB has assured us that any reduction in tariff would result in a corresponding increase in gas subsidy, resulting in a nil impact scenario.
• Reiterate buy call but TP trimmed to RM6.75
Taking into account the challenges facing TNB, we have downgraded our TP to RM6.75, which is a 10% discount to our DCF valuation of RM7.50. The 10% discount was imputed due to the uncertainties facing the group at this time.

Electricity Demand Continues To Fall

Key highlights
TNB’s results recorded a sharp fall in 1QFY09 as the group felt the impact of lower demand, higher fuel cost and a weakening RM. The group only recorded a 1.1% growth in demand y-oy, with all 3 sectors (industrial, commercial and domestic) showing negative growth in November.
The group recorded a total negative growth in demand of 3% in December, and this trend is expected to continue in January as factories close for the upcoming Chinese New Year holidays.

Results analysis
TNB recorded 1QFY09 revenue of RM7.89bn (+27.2% y-o-y, +11.4% q-o-q), bringing its annualised FY09 revenue to RM31.6bn, approximately 3.6% more than our FY09F revenue of RM30.5bn. Considering that there was only a 1.1% increase in demand y-o-y, the increase in y-o-y revenue was mainly due to the tariff rate adjustment that TNB got last June.
However, the increase in revenue was offset by a y-o-y increase in operating expenses of 48.9% this quarter. The increase was mainly due to higher fuel cost which the group had incurred, due to cost of coal averaging at US$113.9/MT.
The weakening RM had resulted in the group recording a foreign currency translation loss of RM1.4bn this quarter, as opposed to a foreign currency translation gain of RM242.4m it recorded in 1QFY08. The higher cost and translation losses resulted in the group recording a loss of RM940.7m this quarter as opposed to a profit of RM1.5bn in 1QFY08.

Challenging year ahead for TNB
TNB is going to face a challenging year ahead as there are very few catalysts to spur an increase in demand going forward. It should be noted that the industrial sector (which includes cement and steel industries), which has been showing a contraction in demand since October 2008, is not expected to pick up its pace until July 2009. Until then, there is a potential of this sector recording a contraction or at best flat demand. This does not bode well for TNB as the industrial and commercial sectors account for about 77% of electricity consumption in the country.
On the cost side, coal prices are expected to average at US$95/MT for 2009. This is slightly lower than 1QFY09 average price of US$113.9/MT, and should help improve margins slightly. However, it should be noted that the Jimmah power plant has come on stream, and this would mean that TNB would have to make higher capacity payments. This would in effect erase all gains that the group might get from the lower cost of coal.
Meanwhile, there have been calls by consumers to reduce electricity tariffs in line with the fall in the price of oil. TNB has assured us that any reduction in tariff would result in a corresponding increase in gas subsidy, resulting in a nil impact scenario.

Reiterate buy call but TP trimmed to RM6.75
We have re-looked at our numbers from FY09 to FY11. We have imputed 0% growth in demand for FY09, 2% growth in FY10 and 4% growth in FY11. Apart from this, we have changed our average coal prices to US$95/MT from FY09 to FY11 and imputed the higher capacity payments for Jimmah. Since any changes in tariff would be mitigated by an increase or decrease of gas subsidy, we have not taken into account these changes in our valuation.
Taking into account the changes above, we have downgraded our TP to RM6.75, which is a 10% discount to our DCF valuation of RM7.50. We have used a 10% discount in light of all the uncertainties surrounding the stock at this time.

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1 Comment Add your own

  • 1. 33  |  January 21, 2009 at 4:33 am

    Great Finance Facts…

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