Tuesday, January 28

Stronger ringgit an advantage to TNB


KUCHING: Tenaga Nasional Bhd (TNB) expects to remain strong going forward on the back of a stronger ringgit and faster than expected recovering economy.After Bank Negara Malaysia (BNM) raised its Overnight Policy Rate (OPR) by 25 basis points on March 4, the ringgit strengthened, particularly in April, having gained by three per cent against the US dollar so far this month.

This led to optimism on TNB given its huge foreign currency denominated loans and coal costs being in US dollars.

Although the research house was of the opinion that the ringgit would eventually weaken against the US dollar, it raised its average ringgit forecast to RM3.25 against the US dollar or a gain of 5.8 per cent for this year.

While this would give rise to forex gains, it would importantly have the effect of lowering coal costs in 2010 by 5.8 per cent given that the effective coal price assumption for the group remained unchanged.

On the other hand, the group was expected to further benefit from better-than-expected demand. Year to date, the group had reported 8.04 per cent growth in Peninsular Malaysia’s demand.

The strongest demand was seen in the industrial sector that reported a growth of 9.4 per cent, followed by 6.8 per cent in commercial and 7.2 per cent in residential demand.

Quarter-on-quarter (q-o-q) the demand grew by 0.5 per cent which was understandable given the shorter month of February.

As such, the research house raised its forecast demand growth from three per cent in 2010 to 4.7 per cent overall, with industrial at five per cent, commercial at four per cent and domestic at six per cent.

Although it was expected that the coal prices would rally into the Northern Hemisphere winter given the recent worst winter for many countries, prices remained stubbornly higher.

High thermal coal prices had been somewhat driven by oil prices which had rallied past US$80 per barrel on sustained economic recovery as well as higher coking coal prices as steel makers had been forced to accept temporary iron ore prices and coking coal.

There appeared to be no slack in coal demand, as evidenced by the battle for control of Australia’s Macarthur Coal, the world’s largest provider of pulverized coal for steel making.

Although coal prices remained high, the research house believed that its forecast of coal price of US$88 per tone for TNB remained applicable based on the recovering global economy.

TNB’s coal prices since January 2009 had been largely stable as the result of effective forward buying. As a result, the research house raised its target price for the company to RM10.04 per share.