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Tenaga – Fundamental Analysis FY15

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Fundamental Analysis of TENAGA NASIONAL BHD by L. C. Chong

https://lcchong.wordpress.com/
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Tenaga – Fundamental Analysis FY15

  1. 1. TENAGA FUNDAMENTAL ANALYSIS Financial Year 2015 (31 Aug 2015) L. C. Chong 23 November 2015
  2. 2. DISCLAIMER I am 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. Stock analysis in this presentation may not neutral because I have incorporated my risk appetite and principles in the analysis. All figures in MYR and in '000s, except per share data 2
  3. 3. DECLARATION OF INTEREST • At the time of writing, I owned shares of TENAGA.
  4. 4. KEEP IN TOUCH http://lcchong.wordpress.com https://goo.gl/jjkq4P
  5. 5. SCOPE • Figures and ratios are based on the figures reported in Annual Report or the latest Q4 Quarterly Report (QR) • Unless there is a need, this analysis will not include financial figures reported in Q1, Q2 and Q3 • I will provide QR result highlights in my blog • Valuation is not covered in this analysis • I will provide valuation in my blog.
  6. 6. CHANGES • 29 Oct 2015 – First write up of TENAGA in PowerPoint format • 22 Nov 2015 – Applied new template and updated figures based on the AR 2015
  7. 7. BUSINESS PROFILE • Primarily involved in the business of the generation, transmission, distribution and sales of electricity • The largest electricity utility in Malaysia and one of the largest in the region • Serves an estimated 8.6 million customers in Peninsular Malaysia, Sabah and Labuan Source: The Edge Markets 1 Aug 2015
  8. 8. BUSINESS PROFILE (CONT.) Generation • 6 thermal power stations and 3 major hydroelectric power generating schemes in addition to supporting the operations and maintenance of 3 Independent Power Producers Transmission • Connects power generated byTNB and IPPs throughout Peninsular Malaysia with Distribution’s network as well as directly to large industrial customers via the NationalGrid Distribution • Supplies the electricity to the end users
  9. 9. OWNERSHIP SUMMARY INSTITUTIONS 49% SOVEREIGN WEALTH FUNDS (>5% STAKE) 30% PUBLIC AND OTHER 19% STATE OWNED SHARES 2% CORPORATIONS (PRIVATE) 0% INDIVIDUALS/INSIDERS 0.00% Position Date: 22 Nov 2015
  10. 10. TOP 5 SHAREHOLDERS KHAZANAH NASIONAL BERHAD 47% EMPLOYEES PROVIDENT FUND OF MALAYSIA 27% PERMODALAN NASIONAL BERHAD 20% JPMORGAN CHASE & CO, PRIVATE BANKING AND INVESTMENT BANKING INVESTMENTS 3% KUMPULAN WANG PERSARAAN 3% Position Date: 22 Nov 2015
  11. 11. ECONOMIC MOATS • Cost Advantage • They have strong support from government 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 • GLC status - Government won't setup a new company to compete with TENAGA. • Efficient Scale • TENAGA is the sole electricity generator in Malaysia. • Have characteristics of rational oligopolies
  12. 12. ECONOMIC MOATS (CONT.) 4.9% 6.7% 4.6% 4.4% 5.0% 1.8% 5.3% 5.9% 6.4% 6.4% 0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 0.0% 2.0% 4.0% 6.0% 8.0% 2006-08-31 2007-08-31 2008-08-31 2009-08-31 2010-08-31 2011-08-31 2012-08-31 2013-08-31 2014-08-31 2015-08-31 ROIC NOPAT ROIC NOPAT is a bit volatile, but increasing in long term
  13. 13. ECONOMIC MOATS (CONT.) 54,751,250 55,692,200 57,325,550 58,903,300 59,937,900 61,939,900 66,515,500 73,699,750 82,111,500 89,864,450 0 20,000,000 40,000,000 60,000,000 80,000,000 100,000,000 2006-08-31 2007-08-31 2008-08-31 2009-08-31 2010-08-31 2011-08-31 2012-08-31 2013-08-31 2014-08-31 2015-08-31 Avg. Invested Capital Invested capital increased every year
  14. 14. ECONOMIC MOATS (CONT.) • Under normal circumstances, ROIC of TENAGA ranged between 5% and 6.7% • Is this range of ROIC normal in the utilities industry?
  15. 15. ECONOMIC MOATS (CONT.) Company 1-Yr ROIC 5-Yr ROIC Edison International 9.11% 6.30% Public Service Enterprise Group 6.23% 8.69% Southern Co. 6.07% 5.83% Williams Companies 5.53% 3.18% Consolidated Edison 4.76% 4.97% NextEra Energy 4.05% 5.56% American Electric Power 4.01% 5.15% NiSource Inc. 3.88% 2.92% Duke Energy 3.46% 3.17% PG & E Corp. 3.40% 5.10% Centerpoint Energy 3.37% 4.60% Exelon Corp. 2.45% 9.48% FirstEnergy Corp. 2.27% 4.16% Dominion Resources 1.12% 5.82% AES Corp. -4.19% 1.62% Source: Seeking Alpha 16 May 2013
  16. 16. ECONOMIC MOATS (CONT.) • As of May 2013, average of ROIC of major utilities companies in US was 5.1%±2% • So, I can conclude that ROIC of TENAGA was above average.
  17. 17. ECONOMIC MOATS (CONT.) • Exception: In FY11, ROIC was 1.8% which is the lowest in history. Reasons: • Operating expenses increased by 19.1% from RM26,519.7m (FY10) to RM30,956.4m (FY11) • Average coal price for the year increased from USD88.2/mt to USD106.9/mt • Additional imports of coal, oil and distillate (5 times higher per kW) due to gas shortfall • Incurred higher Independent Power Producers (IPP) purchases amounted to RM14,213.0, an increase of 13.4% from RM12,528.0.
  18. 18. ECONOMIC MOATS (CONT.) 8.9% 11.4% 5.8% 6.6% 8.1% 1.7% 4.2% 3.5% 2.3% 2.3% 0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 2006-08-31 2007-08-31 2008-08-31 2009-08-31 2010-08-31 2011-08-31 2012-08-31 2013-08-31 2014-08-31 2015-08-31 CROIC Free Cash Flow to Firm CROIC
  19. 19. ECONOMIC MOATS (CONT.) 3,878,950 4,488,200 4,805,950 4,360,650 3,925,500 4,689,750 6,326,150 7,781,400 9,222,600 10,051,850 0 2,000,000 4,000,000 6,000,000 8,000,000 10,000,000 12,000,000 2006-08-31 2007-08-31 2008-08-31 2009-08-31 2010-08-31 2011-08-31 2012-08-31 2013-08-31 2014-08-31 2015-08-31 Avg. Capex
  20. 20. ECONOMIC MOATS (CONT.) • CROIC declined almost every year, and it was only 2.3% in FY15 • The main reason is high capex reduced TENAGA’s free cash flow, while invested capital increased every year • This is probably the reason why TENAGA unlikely to increase dividend payout.
  21. 21. SCALE 0 10,000,000 20,000,000 30,000,000 40,000,000 50,000,000 2006-08-31 2007-08-31 2008-08-31 2009-08-31 2010-08-31 2011-08-31 2012-08-31 2013-08-31 2014-08-31 2015-08-31 Revenue Revenue scale of TENAGA has been increasing every year. The increased scale provides flexibility for a company to mitigate the risks associated with liberalized power markets, including competition in generation and supply and the management of commodity price volatility 7.8% CAGR
  22. 22. PROFITABILITY 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 2009-08-31 2010-08-31 2011-08-31 2012-08-31 2013-08-31 2014-08-31 2015-08-31 Core net profit Net Profit Margin %
  23. 23. PROFITABILITY (CONT.) • FY19 • FX translation loss: -RM1,239m (FY08: RM34m) • Higher average coal price of USD90.2/mt during the year, exceeding the USD85/mt recoverable under the tariff adjustment effected in March 2009 • FY11 • Operating expenses increased by 19.1% from RM26,519.7m (FY10) to RM30,956.4m (FY11) • Average coal price for the year increased from USD88.2/mt to USD106.9/mt • Additional imports of coal, oil and distillate (5 times higher per kW) due to gas shortfall • Incurred higher Independent Power Producers (IPP) purchases amounted to RM14,213.0, an increase of 13.4% from RM12,528.0
  24. 24. PROFITABILITY (CONT.) 19.8% 21.1% 13.9% 19.4% 23.0% 22.1% 25.2% 0 5,000,000 10,000,000 15,000,000 20,000,000 25,000,000 30,000,000 35,000,000 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 2009-08-31 2010-08-31 2011-08-31 2012-08-31 2013-08-31 2014-08-31 2015-08-31 Profit Margin Cost of Raw Material Gross Margin %
  25. 25. PROFITABILITY (CONT.) • Cost of raw material has been increasing over the years • Higher generation costs from the burning of the more expensive imported LNG • Coal plant outages and low hydro availability due to the dry season necessitated the utility company to fully utilise the gas plants which resulted in increased usage of the more expensive liquefied natural gas and at times, even oil and distillates • Revise of tariff regime becomes an important driver of Tenaga’s earnings • Except FY11, TENAGA maintained gross profit above 19% • In FY15, TENAGA achieved 25% profit margin due to lower coal prices.
  26. 26. LEVERAGE & COVERAGE 5.90 x 11.64 x 10.54 x 11.53 x 12.79 x 0.00 x 2.00 x 4.00 x 6.00 x 8.00 x 10.00 x 12.00 x 14.00 x 2011-08-31 2012-08-31 2013-08-31 2014-08-31 2015-08-31 (FFO+Int. Exp.)/ Int. Exp.
  27. 27. LEVERAGE & COVERAGE (CONT.) 29.7% 44.1% 36.2% 34.0% 41.5% 25.6% 43.0% 31.3% 29.6% 36.3% 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 2011-08-31 2012-08-31 2013-08-31 2014-08-31 2015-08-31 FFO To Debt FFO to Debt (FFO – Dividends) / Debt
  28. 28. LEVERAGE & COVERAGE (CONT.) 34.9% 34.4% 39.1% 39.1% 36.5% 32.0% 33.0% 34.0% 35.0% 36.0% 37.0% 38.0% 39.0% 40.0% 2011-08-31 2012-08-31 2013-08-31 2014-08-31 2015-08-31 Debt / Book Capitalization
  29. 29. LEVERAGE & COVERAGE (CONT.) • As of FY15, TENAGA’s leverage and coverage are as below: • (FFO+Int. Exp.)/ Int. Exp. – 12.79x (Aaa) • FFO to Debt – 41.5% (Aaa) • (FFO – Dividends) / Debt – 36.3% (Aaa) • Debt / Book Capitalization – 36.5% (A)
  30. 30. DEBT EXPOSURE AND FOREX JPY 15% USD 7% Others 0.07% RM 78% 31-Aug-15 JPY 13% USD 10% Others 0.19% RM 77% 31-Aug-14 On debt exposure, total debt decreased slightly to RM24.7b (FY15) from RM25.5b (FY14). On the other hand, the debt exposure to USD denominated borrowings was decreased to 7% (FY15) from 10% (FY14).
  31. 31. ANNUAL SYSTEM LOSS Source: Maybank IB Research 30 Oct 2015 System loss = the difference between electricity sales and generation)
  32. 32. GROWTH DRIVERS • Manjung 4 will be the first in Malaysia to utilise an ultra-supercritical boiler which would enable 40% efficiency energy efficiency compared to the existing three subcritical units at Manjung • 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 • 23 Sep 2014 - Consortium of TENAGA and Powertek Berhad (PB) had signed a Memorandum of Understanding (MoU) with Bangladesh Power Development Board (BPDB) to implement RM6b power plant project in Maheshkhali, Cox’s Bazar, Bangladesh.
  33. 33. GROWTH DRIVERS (CONT.) Source: Hong Leong Investment Bank 30 Oct 2015
  34. 34. GROWTH DRIVERS (CONT.) • 5 Mar 2015 – TENAGA's 1,071 megawatt (MW) combined cycle power plant in Seberang Perai, Pulau Pinang, is on track for commercial operation on Jan 1, 2016 • The RM2.5 billion project, utilising the world's largest and most efficient gas turbine (Siemens HClass), is currently 94% complete • 24 Sep 2014 – TNB and 1MDB in RM6bil power deal in Bangladesh • 17 Oct 2014 - Renewable energy generation requires TNB to enhance our distribution system from only supplying power to the consumers to a more sophisticated network. In other words, with the implementation of the Feed-in-Tariff (FiT), TNB system is continuously being upgraded.
  35. 35. GROWTH DRIVERS (CONT.) • 15 Sep 2014 – From June 1 to Aug 26 (last available data point), the average availability of Tanjung Bin was 95%, Jimah 95% and Janamanjung 93%, all healthily above the 85% threshold expected of coal plants • The higher coal plant availability means the proportion of coal-fired generation would have trended up significantly • In terms of sensitivity, every one percentage point increase in the percentage of coal generation (with coal at US$85 [RM272] per tonne) raises FY15 net profit by 4.5% • TNB’s usage of costlier LNG-sourced gas is coming down • TNB is benefiting more from falling coal prices.
  36. 36. GROWTH DRIVERS (CONT.) Source: AmResearch 30 Oct 2015 TNB basking in higher coal usage
  37. 37. PROFITABILITY (CONT.) Source: https://goo.gl/TcZQcP Source: http://goo.gl/IOQIr5 Source: http://goo.gl/UGFPJH
  38. 38. GROWTH DRIVERS (CONT.) Source: AmResearch 30 Oct 2015
  39. 39. GROWTH DRIVERS (CONT.) Source: Hong Leong Investment Bank 30 Oct 2015 Power demand still strong
  40. 40. GROWTH DRIVERS (CONT.) Source: Hong Leong Investment Bank 30 Oct 2015
  41. 41. GROWTH DRIVERS (CONT.) Source: AmResearch 30 Oct 2015 In line with increased power demand, TENAGA increased capex in generation capacity. Segmental Breakdown of TENAGA’s CAPEX
  42. 42. ISSUES/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.
  43. 43. ISSUES/RISKS/CHALLENGES (CONT.) • 17 Jul 2014 – FCPT implementation in 2014 – Delayed, but not derailed • 17 Jul 2014 – Higher generation costs from the burning of the more expensive imported LNG • 1 Aug 2015 – TENAGA to acquire the remainder of 1MDB’s power assets • These assets, five local and eight foreign power plants with a net generating capacity of 5,600MW spanning five countries, are housed under 1MDB’s power arm, Edra Energy Global Bhd.
  44. 44. ISSUES/RISKS/CHALLENGES (CONT.) Source: Maybank IB Research 30 Oct 2015 Usage of imported LNG still high.
  45. 45. POOR STEWARDSHIP • Complacency due to monopoly and protected by government • “Tidak apa” attitude • Most of the workers and management teams are the same people prior to their privatisation • Their work ethic has remained the same despite the transformation to a private entity.
  46. 46. SHAREHOLDER RETURN Time Frame Date Bought at Original Value Dividend Received Unrealized Gain/Loss Current Return CAGR % 3-Y 29 Oct 2012 6.96 6,960 790 5,700 13,450 24.6% 5-Y 29 Oct 2010 7.04 7,040 1,307.38 8,785 17,132.38 19.5% 10-Y 28 Oct 2005 6.464 6,464 2,911.72 13,317.25 22,692.97 13.4% Assumptions: 1. Commission paid is ignored in this simulation 2. The current price is 12.62 (as of the time of writing) 3. Unit purchased is 1,000.
  47. 47. GOING FORWARD • 30 Oct 2015 – FY15 electricity generation was likely lower than budgeted given the weaker-than-projected demand (+2.2% YoY) and the record low system loss. This led to better-than-expected generation mix (coal was up, to 45.6% from 39.8% in FY14), hence the earnings beat. If system loss continues to remain below trend, TNB would be able to deliver earnings growth in FY16 • 30 Oct 2015 – While TNB’s existing operating prospects remain sound, concerns remain over its possible acquisition of Edra Global’s assets.
  48. 48. GOING FORWARD (CONT.) • Positive on TNB’s earnings outlook given the easing trend in fuel costs due to the decline in coal and gas prices • The implementation of FCPT mechanism remains as TNB’s secular catalyst in order to justify an even higher future valuation as it will definitely provide a greater clarity and stability to TNB’s long term earnings • I will continue to hold TENAGA, and may accumulate TENAGA in the future.

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