Thursday, May 19, 2011

Tenaga - Price Target: RM5.90

20 May 2011
Price Target: RM5.90
Share price: RM6.28


Highlights
Malaysia government has been rumoured to either increase electricity tariff rate or the petroleum price by next week in a bid to reduce the government’s burden on subsidies due to surging resources prices i.e. petroleum.

According to Malaysian Insider, the government is more likely to raise electricity tariff.

Pros/Cons
# The last tariff review was in Mar09, benchmarked against coal price of US$85/mt and natural gas price of RM10.70/mmbtu. Tenaga’s earnings had been affected by the surge in coal price to above US$130/mt and currently at US$117/mt, but partly offset by RM appreciation (+20% since March 2009). Currently, Tenaga’s coal cost is effectively benchmarked against US$100/mt (US$85 x 1.2).

# For Tenaga to recoup its surging fuel costs, we estimate that the average electricity tariff rate would need to increase by ~4.6% (Assuming average coal price at US$120/mt).

# However, any revision in electricity tariff rates will not be directly beneficial for the government, unless accompanied by natural gas revision. Hence, the government may take the opportunity to reduce its natural gas subsidy (i.e. increase natural gas price), in view of the main objective to reduce its burgeoning subsidies.

# We estimate that natural gas price may be raised to RM14.40/mmbtu (+RM3.70) to totally offset Tenaga’s incremental earnings from a 4.6% hike in electricity tariff
rate. Petronas may save RM2.7bn, assuming a RM3.70 hike across the board (power and non-power segment) versus estimate of RM2bn savings from a 10sen hike in petroleum products prices alone.

# Hence, Tenaga may not fully benefit from the higher electricity tariff rate if the government hikes the natural gas price at the same time.

Risks Downside risks
# Prolong surge in coal price and natural gas price revision.

# Delay in tariff revision.

Forecasts
Unchanged

Rating Hold
Positives
# Economic growth driving power demand.
# Appreciation of RM.

Negatives
# Natural gas supply disruption.
# Current high coal cost environment.
# High commitment on IPPs payments.
# Adhoc tariff revision.

Valuation
Target price maintained at RM5.90 based on DCFE with Cost of Equity at 11.5%. Review in rating subject to tariff revision that addresses both natural gas and coal cost.


Source: HLeBroking

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