Reserve Margin too high

1. KDN: PP 10744/04/2009
20 January 2009
Results Update
TENAGA NASIONAL NEUTRAL
Challenging prospect TP: RM6.20
Price ( 08) RM6.05 Tenaga Nasional reported a 1Q09 loss amounted to RM944.1m on the back
of higher fuel costs, higher IPP payment and foreign currency translation
Stock Data
loss of RM1.4b. Margins suffered greatly, down from 40.3% to 21.5% y-o-y.
We have made revisions to our FY09 forecast and cut our target price to
Bursa / Bloomberg TNB MK
RM6.20. Maintain NEUTRAL.
Board / Sector Main
Syariah Compliant Yes A heavy burden to bear. Excluding the proposed tariff cut, TNB is facing the
Issued shares (mil) 4,334.6 burden of a weak RM exchange rates versus the US$ and JPY, against which it
Par Value (RM) 1.00 depreciated by 7% and 21% respectively in 1Q09. However, the biggest culprit is
Market cap. (RM’m) 26,224.3 the excessive IPP payment which rose by nearly 40% y-o-y in 1Q09 and could
exceed the RM11b mark this year after the commissioning of Jimah power plant.
Price over NTA 1.06
52-wk price Range RM10.40/RM5.80 Revision in demand growth. Slower demand is envisaged with margin remains
Beta (against KLCI) 0.78 under pressure. Demand growth is estimated to be “flattish” circa 1% level for this
3-mth Avg Daily Volume 5.7m financial year as compared with an earlier estimate of a 3%-4% growth.
3-mth Avg Daily Value^ RM34.5m
Rising costs. Apart from the 40% rise in IPP payment, TNB is also facing a 128%
^ based on closing price
increase in fuel costs, of which coal is the main culprit. The average coal price
secured for 1Q09 was at US$113.0/MT versus US$76/MT in FY08. The group is
Major Shareholders targeting US$90/MT average for FY09.
Khazanah Nasional 37.8%
EPF 13.5% The downside risks on TNB would be (i) high capacity payments to IPP; (ii)
weaker RM/US$ that would have a negative impact on its foreign debt of about
PNB (Skim ASB) 8.9%
RM11b as well as the RM costs of coal; and (iii) the possibility that the tariff cut
without a corresponding reduction in gas prices.
Daily Chart
Dividends may take a hit too. Tenaga’s dividend policy is a payout of 40%-60%
of its free cash flows (FCF). Given the weaker earnings prospect, indications are
that dividend for FY09 may be lesser due to lower estimated FCF.
Revised earnings outlook but maintain NEUTRAL. We have revised our net
earnings forecast for FY10 to take into account the forex translation loss, the
margin squeeze and slower demand growth. Accordingly we have revised
downwards Tenaga’s target price to RM6.20 from RM6.80 previously.
FYE 31 Aug FY07 FY08 FY09F FY10F
Source: Bloomberg
Revenue (RM’m) 23,320.4 25,750.6 31,244.2 34,368.1
Operating profit (RM’m) 5,542.7 4,042.0 3,191.8 3,347.5
Zulkifli Hamzah Pretax Profit (RM’m) 4,765.9 3,025.2 1,816.2 2,518.3
Wan Azhar Mustapha
Net Profit (RM’m) 4,061.1 2,594.0 1,455.2 2,014.4
wan.azhar@midf.com.my
03-2173 8393 EPS (sen) 93.7 59.8 33.6 46.5
EPS growth (%) 83.70% -36.1% -43.9% 38.4%
PER(x) 6.5 10.1 18.0 13.0
Net dividend (sen) 8.6 15.2 7.6 7.6
Dividend Yield (%) 1.4% 2.5% 1.3% 1.3%
KINDLY REFER TO THE LAST PAGE OF THIS PUBLICATION ON IMPORTANT DISCLOSURES
MIDF RESEARCH is part of MIDF Amanah Investment Bank Berhad (23878 - X).
(Bank Pelaburan)
(A Participating Organisation of Bursa Malaysia Securities Berhad)

2. MIDF EQUITY BEAT
Tuesday, 20 January 2009
Tariff cut. The management has stated that any reduction in electricity tariff must be compensated with a
corresponding reduction in gas prices. The main issue is whether Petronas would want to reduce its current gas price
of RM14.31 per mmbtu which is already at a steep discount to the prevailing market price of about RM21 per mmbtu.
Why pay the IPP so much? The biggest thorn in TNB is the high IPP capacity payment estimated to exceed RM11b
for the financial year. With Jimah power plant to go on stream this year, TNB could incur an additional RM500m to
RM1b IPP payment. This is generally viewed as excessive given TNB current reserve margin is at 47%. The big
question is, why pay extravagantly for something you don’t need?
TENAGA NASIONAL: 1QFY09 Results Summary
Quarterly Results Comments
FY Aug (RM’m) 1Q09 %YoY %QoQ
Turnover 7,895.0 27.2% 11.4% Y-o-y higher revenue was due to the tariff hike in July 08,
while q-o-q performance was undermined by a weaker
demand growth at just 1.1% q-o-q.
Operating profit 942.4 -44.0% 263.3% The group incurred a significantly higher operating expenses,
up 48.9% y-o-y mainly due to:
(i) 39.5% higher IPP payment
(ii) 128.2% increase in fuel costs
(iii) 40.5% increase in staff costs from an average of 6%
salary increments and RM52m in back dated salary
adjustment from a collective agreement.
EBITDA margin was halved, from 40.5% to 21.5% y-o-y.
Forex translation loss (1,439.7) -693.9% 398.5% US$ and JPY appreciated 6% and 21% respectively in the
quarter under review on a total of RM11b in foreign debts.
Forex transaction gain 2.0 -1100.0% -129.4%
Associate 7.8 -17.0% -32.2%
Pre-tax profit (772.7) -147.0% 180.8%
Tax & zakat (168.0) 32.2% 2654.1%
Minority interest 3.4 70.0% 112.5%
Net Profit (944.1) -162.3% 233.7% Net profit before forex translation loss was at RM495.6m.
1Q09 FY08 FY07
Avg coal prices (US$) 113.9/MT 76.4/MT 45.3/MT The average coal price for the remaining quarters are
expected to be lower with an estimated average of US$90/MT
for FY09.
1Q09 4Q08 % chg
RM/US$ 3.62 3.39 -6.8% We anticipate forex loss to ease in the upcoming quarters
with the expectation of US$ and JPY to weaken against the
RM/JPY 3.8 3.13 -21.4%
RM.
Source: Company, MIDF Research
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3. MIDF EQUITY BEAT
Tuesday, 20 January 2009
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MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS
STOCK RECOMMENDATIONS
BUY Total return is expected to be > 5% compared with that of an assigned benchmark
over the next 12 months.
TRADING BUY Stock price is expected to rise within 3-months after an investment rating has been
assigned due to positive newsflow.
NEUTRAL Total return is expected to be between -5% and +5% compared with that of an
assigned benchmark over the next 12 months.
SELL Total return is expected to be < 5% compared with that of an assigned benchmark
over the next 12 months.
TRADING SELL Stock price is expected to fall within 3-months after an investment rating has been
assigned due to negative newsflow.
SECTOR RECOMMENDATIONS
OVERWEIGHT The sector is expected to outperform the overall market over the next 12 months.
NEUTRAL The sector is to perform in line with the overall market over the next 12 months.
UNDERWEIGHT The sector is expected to underperform the overall market over the next 12 months.
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