Tuesday, July 12, 2011

Stock To Watch: Tenaga: Another Good News

12 July 2011
Price Target: RM7.91
Share price: RM6.70

# Sabah and Labuan average electricity tariff to increase by 3.75sen/kWh(+15%) to 29.25sen/kWh effective 15 July 2011, since the last revision in April 1986 (~25 years).

# Estimated 75% domestic users will not be affected by the new proposed tariff structures ,while the remaining 25% may experience up to 23% increase in total electricity bill.

# Some 61% (1,826 consumers) of low voltage industrial consumers with consumption of 1-2,000kWh would not be affected.

# Electricity tariffs rates for public lighting maintained by local authorities reduced from 30sen/kWh to 16sen/kWh (-47%).

# First time introduction of Peak/Off-Peak tariff classes for existing and new Medium Voltage Commercial and Industrial users.

Financial Impact
Sabah and Labuan population consumed ~4.3% of Tenaga total power consumption of 100TWh per annum. A 15% increase in tariff for this 4.3% power consumption will contribute ~RM170m (~4.2%) directly to Tenaga’s PBT and ~RM110m to PATMI (Tenaga own 80% of SESB).

# Positive on the implementation of tariff increase, as it helps to address the issues of continuous fuel subsidy and sustaining its overall operation and capex in Sabah.

# However, we reckon that SESB (Sabah Electricity Sdn Bhd) will still be making losses despite the tariff hikes to 29.25sen/kWh. For FYE8/2010, SESB reported unit costs of 31.02sen/kWh even with government fuel subsidies of RM521.4m or 12.87sen/share.

Risks - Downside risks
Government decision to delay tariff revisions.

Increased FYE8/2011 earning by 0.6% and FYE8/2012-13 by 3.4%.

Rating - BUY
- Economic growth driving power demand.
- Implementation of FCPT mechanism.

- High commitment on IPPs payments.
- Decision on tariff revisions depends on the government.

Increased target price to RM7.91 (Previous RM7.80) based on Discounted Cash Flow.

Source: HLIB Research

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