TENAGA NASIONAL BHD (TENAGA) 26/1/214 Financial Year: 213 31-Aug-213 Latest Quarter: 3/11/213 Price: 11.48 Stock Category: Turnaround Board: Main Board FBMKLCI: YES Industry: TRADING SERVICES Sub-Sector: Ownership: - Corporate Owned (Local) - Government & Politically Linked ELECTRICITY GENERATION/DISTRIBUTION/PROD L. C. Chong is NOT an investment advisor nor a financial advisor, and no information provided here is to be interpreted as a suggestion to buy or sell securities. All figures in thousands of Ringgit Malaysia except per share values and ratios Click here to understand definition of some financial terms Prepared by: L. C. Chong Website: http://lcchong.wordpress.com L. C. Chong Page 1 of 6 http://lcchong.wordpress.com
TENAGA NASIONAL BHD FY213 3-11-213 Latest Rolling 4 Quarter Results CROIC ROIC 12, 1, 8, 6, 4, 2, 35 3.83 3.743 25.71 23.6 25 2 15 1 3.94 5 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Turnover Net Profit EPS Revenue and Earnings PER SHARE VALUE (CENTS) 6.% 4.% 2.% -2.% 6 4 2 Gross Profit Margin 6.% 4.% 2.% 2 15.% 1 5.% Net Profit Margin 4, 3, 2, 1, Revenue EBIT Net Income Balance Sheet 12, 1, 8, 6, 4, 2, Total Assets Total Liabilities Total Equity Cash Flow 12, 1, 8, 6, 4, 2, -2, 15.% 1 5.% -5.% 2 1-1 Valuation FCF/Sales Debt Coverage (FCF) -2. -4. DCF 3-Y 5-Y 1-Y Good 8% 1.9 2.12 2.37 Base 4% 1.15 1.1.94 Bad %.45.19 -.24 Ugly -4% -.2 -.61-1.21 EY% Valuation R4Q-EPS FY14-EPS FY15-EPS Buy Under 11.57 11.38 12.55 Sell Above 15.91 15.65 17.25 2.. 3 2 1 Absolute P/E Fair Value Valuation 14.59 Cash Conversion Cycle Debt/Equity Operating Owner Earnings
Financial Highlights Performance of FY213 - Demand growth. TNB reported a FY13 revenue of MYR37.1bn, up by a decent 3.6% y-o-y, fuelled by higher electricity sales, which rose 3.8% over the period. Meanwhile, its operating expenses inched up marginally by.9% y-o-y, as favourable fuel costs helped to mitigate the higher general expenses and other provisions. It is worth noting that average coal prices stood at USD83.6 per tonne in FY13 vis-à-vis USD13.6 in FY12. - MYR348.9m LNG fuel cost-sharing. Following the commencement of the liquefied natural gas (LNG) regasification terminal in Sungai Udang, Melaka on 23 May, management has guided that TNB received an average gas supply of 1,2-1,3m standard cu ft per day (mmscfd) in 4QFY13. Given that the Government has yet to decide on the cost sharing mechanism in relation to the additional 2-3mmscfd LNG supply while Petronas has highlighted that anything above 1,mmscfd will be supplied at the market rate, TNB s management took a preemptive approach to book in one-third of the incremental costs on its LNG procurement, which amounted to MYR348.9m in 4QFY13 alone. - Sales driven by higher demand. Higher electricity sales. TNB reported a FY13 revenue of MYR37.1bn, up by a decent 3.6% y-o-y, driven by higher electricity sales, which rose 3.8% over the period to 99,921 GWh. Consumption in both the commercial and domestic sectors grew by a sturdy 4.7% and 7.3% y-o-y respectively, while the industrial segment also posted a decent growth of 1.3% y-o-y. - Weakness in coal prices. Favourable coal prices. The group s operating expenses inched up.9% y-o-y as favourable fuel costs helped mitigate the higher general expenses and other provisions. Note that average coal prices closed at USD83.6 per tonne in FY13 vis-àvis USD13.6 in FY12, with a total procurement of 2.8 tonnes in both years. Meanwhile, payments to independent power producers (IPPs) fell 1.5% y-o-y due to lower capacity payments incurred as a result of unplanned outages at one of the IPP s power plants. We understand that savings from this amounted to around MYR2m in FY13, but we do not discount the possibility of a potential reversal, pending management s ongoing discussions with the IPP involved. - Pre-emptive approach to book in LNG fuel cost-sharing. MYR348.9m LNG fuel cost-sharing. Following the commencement of the LNG regasification terminal in Sungai Udang, Melaka on 23 May, management guided that TNB received an average gas supply of 1,2-1,3mmscfd in 4QFY13. Given that the Government has yet to decide on the cost-sharing mechanism of the additional 2-3mmscfd LNG supply while Petronas, on the other hand, has highlighted that anything above 1,mmscfd will be supplied at the market rate, TNB s management took a pre-emptive approach to book in one-third of the incremental costs on LNG procurement, amounting to MYR348.9m in 4QFY13 alone. - Adjusted net profit reached MYR4.4bn. Within expectations. Stripping this out, TNB s FY13 adjusted core f b h f ll f d d b % Performance as at 3-11-213 - TNB reported the first quarter of 214 ending November 3, 213 revenue growth of five per cent to RM9.6 billion as a result of the 2.6 per cent growth in power demand. - The group's net profit improved 23 per cent year-on-year due to a lower effective tax rate of 22.6 per cent. - TNB's operating profit declined 13 per cent year-on-year due to higher fuel costs of 57.8 per cent year-on-year, from liquefied natural gas (LNG) and burning of oil and distillate. - Earnings were negatively impacted by outages in the Tanjung Bin and Jimah coal power plants, which resulted in higher-than-expected fuel costs. - As a result of the outages, Tenaga had to burn more LNG, oil and distillates, which are more expensive than coal. This reduced its EBITDA margin by 3% pts to 28%, compared to 1QFY13. 1QFY14 net profit of RM1.44bn was higher yoy by 41.9%, due to lower tax rates arising from the one-off impact of the reversal of the deferred tax provision, which reflected the reduction of the corporate income tax rate from 25% to 24%. Stripping out the deferred tax reversal would bring net profit to about RM1.5bn. - TNB's share of LNG cost with Petronas and the government has been increased to 5 per cent from 33 per cent previously, resulting in a higher LNG cost of RM15 million in the first quarter of this year due to adjustments in previous quarters in the last financial year.
Economic Moats Economic Moats: Wide Cost Advantage - TENAGA is the sole electricity generator in Malaysia. They have almost full control in pricing. Switching Costs - Like it or not, we can't live without TENAGA. Network Effect - The more people consume electricity, the more money they make. So simple! Intangible Assets Not available or no moat found Efficient Scale - TENAGA is the sole electricity generator in Malaysia. They have almost full control in pricing. Growth Drivers & Risks/Challenges Growth Drivers
- TNB to introduce fuel cost pass through (FCTP) in 214 to improve efficiency. - Under this mechanism, any changes in fuel cost will be channeled to users through the tariff rates implemented by the government. - Users would be given an incentive if power is used economically and a penalty would be issued if wastage in power is detected. - The likelihood of delays in reform implementation is low as the government's political will is strong after the recent general election win. The recent hike in petrol prices reinforces our view that the government is not shying away from implementing subsidy cuts and tariff hikes. We believe that as part of the FCPT implementation, the average electricity tariff will be raised from its current average of 33.8sen/kWh level. - Manjung 4 will be the first in Malaysia to utilise an ultra-supercritical boiler which would enable greater energy efficiency compared to the existing three subcritical units at Manjung. While the existing Manjung power plant operates at c.35.4% thermal efficiency, Manjung 4 is expected to achieve close to 4% efficiency. This means that Manjung 4 will be able to produce more electricity with the same amount of coal, resulting in lower operating costs per unit of generation. - Gas shortages to the power sector are in its final days with the Melaka regasification terminal set to commence soon and Tenaga will no longer be burdened by the excessive use of alternative fuel. We expect higher coal cost in 2H, but still lower on a full year basis. With the 13GE over, risk of sector reform delays has dissipated. - On 1 Jul 213, Tenaga Nasional Bhd and its joint venture partner Kharafi National have signed a contract worth 88.9 million Kuwait dinars (RM1 billion) with Kuwait's Ministry of Electricty & Water (MEW) for the operation & maintenance of Shuaiba North Co-Generation (Power & Distillation) plant. - The contract was signed via its wholly-owned subsidiary TNB Repair and Maintenance (TNB REMACO) and would be for a period of seven years. - The dual-fired plant (natural gas and distillate), is able to produce around 78MW of power and 45 million imperial gallons per day of distilled water. The plant was commissioned in. - On 16 Jul 213, TENAGA has been selected as the preferred bidder in the 'Fast Track Project 3A' International Competitive Bidding to develop a 1, MW Coal-Fired Power Plant at Manjung, Perak. A letter of award will be given after negotiations have been completed. - The plant, which will be using Hitachi's ultra-supercritical boiler technology, will be developed over 45 months with commercial operations scheduled on 1 October 217, earlier than the previously announced gradual commencement dates from October 218 to April 219. ll h h f h l ll b ' l Risks/Challenges - A/R increases much faster than booking sales. They should be more diligent to collect outstanding bills. - Very sensitive to currency appreciation/depreciation - the weakening of the Ringgit against the US Dollar can cause loss in foreign currency translation. - Tenaga still burdened by the excessive use of alternative fuel. - Disruption in gas supply. - Government possibly delay tariff revision in the future. - Indonesia implements tax on coal export. - Utilization of coal-fired power plants have reach limit.
Strategy My Thoughts: - The outperformance in stock price was a pleasant surprise, although the drivers behind it are likely unsustainable in our view. Nevertheless, 1Q was not a representative quarter in any case, as the new tariffs (+15%) to end-users are only effective in Jan 214. - I remain positive on TENAGA as I believe i) consensus has yet to incorporate the full earnings accretion from the tariff hike and, ii) the reduced earnings risk under the Incentive-based Regulation (IBR) has not been fully priced in. - I will continue to hold TENAGA even if I sold 6% of stakes. I may accumulate TENAGA a bit if there is a new growth driver. Portfolio Strategy: Lump Sum + Top Up Averaging Down Method: - Dollar Cost/Value Averaging Portfolio Execution: - Buy and Monitor - Momentum BUY1;BUY3;BUY4;BUY5;BUY13 Buying Basis: EPS QoQ Growth > 15% Price is below Intrinsic Value (DCF) Price is below Intrinsic Value (EY%) Price is below Intrinsic Value (Absolute PE) Price is below Intrinsic Value (ERM) Price is below Intrinsic Value (DY%) Stock price breaks out of consolidation/dip on an uptrend. Company owner/directors, and major fund institutions heavily buying SELL6;SELL8;SELL9;SELL1;SELL11;SELL12;SELL14 Selling Basis: Quarterly EPS drop for 3 consecutive months. Price has risen too far from its intrinsic value (DCF) Price has risen too far from its intrinsic value (EY%) Price has risen too far from its intrinsic value (Absolute PE) Price has risen too far from its intrinsic value (ERM) Price has risen too far from its intrinsic value (DY%) Long term trend changed from bullish to bearish Company owner/directors, and major fund institutions heavily selling Fundamental of business turns unattractive or bad (bear cases) The current price is 3% away from my average holding price. Other good reasons stated in MorningStar's article. L. C. Chong Page 6 of 6 http://lcchong.wordpress.com