Sunday, August 21, 2011

Profit Warning for Tenaga

22 August 2011
Price Target: RM6.52
Share price: RM5.55


News
# Tenaga has issued profit warnings on the potential lower earnings for FYE08/11 as compared to the consensus’ RM1.4bn net profits. For 9MFY11, it reported core net profit of RM813m.

# Tenaga has been suffering from gas curtailment since March 2011 due to Petronas scheduled maintenance up to Jan 2012. However, Tenaga was expecting improved gas supply post its 3QFY11 (March-May 2011).

# During the gas curtailment period, Tenaga has to source for energy from alternative fuels power generation (i.e. distillate and oil), which cost 5-6x higher than gas power generation.

# According to CEO, Datuk Seri Che Khalib Mohamad Noh, Tenaga incurred additional fuel cost of RM400m/month for the past few months. The additional cost continued to affect Tenaga’s cash flow.

# Following the profit warning, Datuk Che Khalib also pointed out potential lower dividend payout for FYE08/11 due to cash flow constraint. Tenaga has a dividend payout policy of 60% of its free cash flow.

Financial Impact
None, as we have already projected the lower earnings with a forecast of RM1bn for FY08/11 (29% below consensus).

Pros/Cons
# We expect the shortage of gas supply for 4QFY11 to fare better as compare to 3QFY11, as Tenaga has ended the power purchase agreement with Power Seraya (Singapore) since June.

# Despite higher overall unit cost, Tenaga will partly recover the additional cost after the implementation of higher tariff rate since 1st June 2011.

# The fast-tracking of re-gasification project in Melaka, will ensure adequate gas supply for Tenaga power generation by mid 2012.

Risks
- Continued disruption in gas supply.
- Government delay tariff revision.

Forecasts
Unchanged.

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

Negatives
- High commitment on IPPs payments.
- Utilization of coal-fired power plants have reach limit.
- Decision on tariff revisions depends on the government.
- Short term gas curtailment.

Valuation
Despite earnings unchanged, we have lowered our target price to RM6.52 (based on DCFE for FY08/12) to account for higher risk premium. However, since the share price has plunged below our new target price, we upgraded Tenaga to BUY.



Source: HLIB Research

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