Tenaga Nasional RM5.68: Buy

Results Review

Share price: RM5.68
Target price: RM6.90

Fuel cost sharing mechanism worth RM2b

Coming together; upgrade to Buy. Tenaga received confirmation for
a fuel sharing mechanism with the government and PETRONAS. Each
party will equally split the additional cost incurred of RM3.1b for burning
pricey oil and distillates which means Tenaga will get a RM2b cheque
soon. The investment proposition for Tenaga has improved; a tariff
revision is very much in the bag. We upgrade the stock to BUY based
on higher earnings outlook and better balance sheet health, with a new
target price of RM6.90 (+17%) pegged to 13x FY12 PER.

The details. This fuel cost sharing mechanism is in response to the
extra cost incurred by Tenaga for burning alternative fuels due to gas
supply shortages from PETRONAS. This covers the period of 1 Jan
until 31 Oct 2011 (10 months) amounting to approximately RM3.069b.
No detail was divulged on when the actual payment will be made, but
we can safely assume that it will be within Tenaga’s FY12 period.

Balance sheet resuscitation, but do not expect dividends yet. This
news is a game changer as Tenaga needs some form of balance sheet
resuscitation as it only have RM4.0b of cash as at end-FY11; it incurred
a cash burn rate of RM4.4b in FY11. This resolution will improve on
Tenaga’s debt outlook and its sacred AAA rating should be intact.

1QFY12 not so pretty yet. We caution however that there will still be
challenges as gas supply is low, in the 1,050 mmscfd level versus the
normal level of 1,250 mmscfd. This means Tenaga will still incur hefty
alternative fuel cost bill in 1QFY12 for the supply shortfall. Nonetheless,
the fuel cost sharing mechanism will compensate two months of 1Q
FY12 (Sep & Oct) and therefore we expect Tenaga to, at least, breakeven
(versus our initial expectation for a loss). The RM2b cost sharing
from PETRONAS and the government does provide comfort for further
compensation in the event of an extended gas supply shortage.

Tenaga regains its blue chip stock status. Tenaga’s outlook has
improved materially on both accounts of profitability and balance sheet.
Furthermore, there is a possible tariff hike in Dec/Jan, and coal prices
have receded by 8% in the last 3 months alone. We have raised our
FY12-14 earnings by 17.4%, 7.3% and 2.7% respectively thanks to
lower fuel cost bill. We have not imputed any tariff hike in our model.

(Information from MBB)