Saturday, December 3

TNB’s earnings remain supportive

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KUCHING: Tenaga Nasional Bhd’s (TNB) earnings remain firm although there was no immediate news on the tariff hike.OSK Research Sdn Bhd (OSK Research) in a research report cited that the spike in energy prices due to the record cold winter has little impact on TNB’s earnings as there were concerns that higher coal prices will erode into its profit.

It noted that with the Northern Hemisphere was experiencing its most severe winter in many years, energy prices ranging from coal to natural gas have risen marginally. The situation also led to oil prices rising above US$82 per barrel while Newcastle coal’s price was US$88 per tonne up from US$72 per tonne in October 2009.

As TNB bought the bulk of its coal from Indonesia where the price was cheaper by some 10 per cent to 15 per cent, the company’s earnings will not be severely affected by the jump of coal prices recently.

Nonetheless, the research firm believed that coal prices were still manageable as its forecast did not incorporate the effects of a tariff hike and thus any delay would not impact the estimates of TNB’s earnings.

Meanwhile, OSK Research also noted that tariff was not discussed at the recent Cabinet meeting whilst Domestic Trade Cooperative and Consumerism Minister Datuk Seri Ismail Sabri Yaakob stated that the subsidies on flour, sugar and gas would be retained.

The research firm believed that Ismail referred to the subsidy on liquefied petroleum gas (LPG), which was generally used as cooking gas in Malaysia rather than the subsidy on natural gas mainly for power generation and industrial use in Malaysia.

Apart from that, OSK Research still estimated that Asean gas prices were at RM32 per millions of British thermal units (mmbtu) and that gas for the power sector should be at a subsidized RM12 per mmbtu.

This meant that a 20 per cent hike in gas prices was due, with a corresponding 5 per cent to 6 per cent hike in electricity tariffs, or a 1 per cent effective hike in TNB tariffs, being justified.

In the meantime, there was a possibility that the tariff adjustment may be delayed as the Government is committed to reducing the petrol subsidy. OSK Research observed that tariffs have a far larger impact on TNB’s core net profits rather than change in coal prices based on its sensitivity analysis.

It pointed out that even if cold weather did not bring about a temporary spike in coal prices, the impact to TNB was not that significant while the lack of a tariff hike might mean weighing some selling pressure on TNB’s shares.

Therefore, OSK Research maintained its optimistic outlook on TNB and pegged its share price at RM9.38 per share.

On the other hand, AmResearch Sdn Bhd (AmResearch) said TNB would only adjust electricity tariff based on the gas price factor and exclude other variables. It noted that natural gas prices has surged by 74 per cent and coal prices by 17 per cent since early November last year due to the stronger demand in winter.

It also observed that TNB would need to pay higher capacity charges amounting to RM800 million for financial year 2010 compared with RM200 million in financial year 2009 for the 1,400 Megawatt (MW) Jimah coal-fired power plant.

It added that Jimah’s capacity charge will go up to RM1 billion in financial year 2011.

AmResearch believed that TNB’s electricity tariffs would nevertheless be reviewed some time between January and February this year given the Government’s bi-annual energy review policy.

Thus, AmResearch remained positive on the prospects of TNB due to a strengthening ringgit, which will elevate the company’s future earnings, continuing policy emphasis in moving to a more market-based tariff mechanism and potential write-back of RM300 million to RM400 million provisions made in financial year 2008.

The research firm pegged TNB’s fair value at RM9.90 per share.