Hot gas and coal sweat
“Oh my God” scenario. RM1,299m 1HFY11 core net income (-18.8% YoY) was 61% of our full-year forecast and 49% of consensus. 1H was very tough, but business conditions will be even more challenging in 2H due to higher coal prices, a shortage of natural gas supply and possibility of a tariff hike.
Maintain Sell with a lower price target of RM5.40, based on 4.6x FY12 EV/EBITDA – a 20% discount to its longterm average to reflect the challenging operating environment.
Lower demand, higher cost. 2QFY11 core net profit of RM480m (-43% YoY, -42% QoQ) was lower than our expectation of RM705m.
The main variance was lower power demand growth of 2.0% while we expected 3.0%. Secondly, gas supply disruptions reduced supply to 1,026 mmscfd, which is 10.9% lower than 1QFY11.
This forced Tenagato burn oil and distillates which added RM181m to costs.
‘Coal’ sweat.
Coal prices remain at high levels despite the resumption of operations in Australia after the floods. Tenaga’s average coal cost in FY11 is likely to exceed management’s prediction of USD110/mt,and be closer to our predicted USD115/mt. The FY11-to-date price (Newcastle benchmark) is USD115/mt (+36% YoY), and the spot price
is USD123/ton. We estimate this adds RM232m in costs to FY11.
Gas quandary.
Tenaga receives ±1,000 mmscfd of gas, roughly 20% lower than its quota due to supply chain problems.
Petronas Gas will conduct a maintenance shutdown for 31 days during Apr-Jun; this is
alarming as it is a peak electricity demand period.
Gas supply will reduce by 28%-32% and Tenaga will offset this by burning more coal,
oil and distillates.
We estimate this will add RM230-250m over the shutdown period.
Risk on the upside.
We have reduced our FY11 earnings by 19.5% after imputing the higher fuel cost. There is no change to FY12-13 earnings pending a management visit.
Our cautious outlook is due to the input cost pressure, outcome of the natural gas maintenance shutdown and extremely tight reserve margins.
Should there be more gas outage problems, Tenaga has no choice but to burn oil and
distillates; this is a loss-making proposition.
Tenaga is a play on coal price.
Tenaga’s average coal cost in 2QFY11 was USD103.8/mt (+26% YoY, +8% QoQ) while FY11-to-date coal price (Sept 2010 to Apr 2011) averaged USD114/mt (+36.7% YoY).
The table below shows Tenaga’s sensitivity to coal price increases.
In FY11, every USD10/mt increase in coal price will add RM513m to costs after netting off hedging benefits.
Tenaga has hedged 16.8% of its coal consumption at
Without this hedging gain, the impact will be higher at RM616m.
Running low on gas.
Based on official allocations, Tenaga should receive 1,250 mmscfd from PETRONAS. But in reality, Tenaga is only getting ±1,000 mmscfd due to problems at the PETRONAS supply chain.
The Bekok gas field is offline due to a fire in mid-Dec 2010; repair works are ongoing and it should be partially ready in June 2011.
Secondly, another gas platform (Jerneh) is experiencing production difficulties and supply will be temporarily disrupted.
2011-04-24
Tenaga Nasional Share price: RM6.03 Target price: RM5.40 (from RM5.73)
MAHB:
North Korea's Air Koryo makes maiden landing at KLIA. North Korea national airline Air Koryo made its maiden landing at KL International Airport (KLIA) on Monday and will start a twice-weekly service to Kuala Lumpur from Pyongyang on April 18. (Source: The Star)
BAT:
Expects to double exports this year. British American Tobacco (Malaysia) Bhd (BAT) expects to double exports this year, a move that will give it a small revenue boost amid tougher sales at home. It may also sell some machinery it no longer needs, valued at between RM18m and RM20m. (Source: Business times)
Berjaya:
Confirms Kim Eng approach. Berjaya Corp Bhd confirmed that Kim Eng Holdings Ltd has approached it about the possibility of buying all of Inter-Pacific Securities Sdn Bhd. (Source: Bursa Malaysia)
Smartag:
Gets role in Customs project. Smartag Solutions Bhd said it was named to be part of a government project to provide security and trade facilitation system for the Royal Malaysian Customs at its checkpoints throughout the country. (Source: Business times)
E&U:
SEB to buy 30% of Bakun Dam for RM1.3b? Sarawak Energy Bhd (SEB), the state utility company, is believed to have proposed to acquire a 30% stake in the Bakun Hydroelectric Power project for RM1.3b cash. SEB is valuing Bakun Dam project at RM6b which is below the RM8b expected by Sarawak Hidro Sdn Bhd. (Source: The Star)
O&G:
Petronas exits Cairn India. Petroliam Nasional Bhd (Petronas) has sold its entire 14.9% in Cairn India Ltd for USD2.1b (RM6.4b). (Source: Business times)
Steel:
Starshine plans to list on Ace Market by Q3. Steel products player Starshine Holdings Bhd (SHB) is planning a listing on Bursa Malaysia's Ace Market by the third quarter of the year. It will invest RM32m in a new plant in Klang and new machinery to broaden its product offering. (Source: The Star)
Economic Transformation Programme
12 more projects, initiatives and enablers with RM11.16b investment commitments under eight Entry Point Projects (EPPs)in seven National Key Economic Areas (NKEAs) i.e.
five in “Communication Content & Infrastructure” (CCI),
two in “Electronics & Electrical” and
one each in “Oil, Gas & Energy”, “Tourism”, “Education”,“Wholesale & Retail” and “Business Services”.
They are to generate RM16.62b in gross national income (GNI) and 74,457 new jobs. The
biggest project in this round of announcement is the Karambunai
Integrated Resort City (KIRC) under Tourism NKEA with investment value of RM9.6b (86% of total) generating RM9.319b GNI (56% of total)and 11,002 jobs (14.8% of total) by 2020
41.2% of EPPs, 13.4% of the total EPP investments, 14.3% of the targeted incremental GNI and 9.1% of expected new jobs creations have been confirmed.
Since the official unveiling of the Economic Transformation Programme (ETP) in Oct 2010, the Government made five rounds of updates which confirmed 72 projects, initiatives and enablers in 54 EPPs under 11 NKEAs with investment value of
RM106.4b that are expected to raise RM153.8b in GNI and create 298,865 jobs.
To recap, under ETP, the Government identified 131 EPPs under 12 NKEAs with RM794.5b targeted investment out of the total RM1.4tr investment required in 2011-2020 to raise GNI by RM1.1tr, generate 3.3m jobs and push the nation into a high-income
economy.
Maybank:
Gets approval to raise USD2b, Bio-Xcell gets funding from Maybank. Malayan Banking Berhad (Maybank) has obtained approval from the Securities Commission (SC) to establish a multi currency medium-term notes (MTN) programme of up to USD2b.
Separately, Maybank and Malaysian Bio-Xcell Sdn Bhd (Bio-XCell) has signed an agreement for a RM250m Commodity Murabahah Term Financing - Islamic Facility (CMTF-i). (Source: Bursa Malaysia, The Star)
Axiata:
Celcom signs fiberisation deal with Sacofa. Celcom Axiata Bhd signed a RM168m fiberisation leasing agreement with Sarawak-based Sacofa Sdn Bhd.
With the completion of this project, Sarawakians will be able to enjoy enhanced services such as high-definition voice and video plus high-speed browsing with Celcom. (Source: The Star)
Affin:
To convert Indonesia's Bank Ina into Islamic lender.
Indonesia's conventional bank PT Bank Ina Perdana, which is being acquired by Affin Holdings Bhd will be converted into an Islamic bank - a process that will likely take two years. (Source: Business Times)
Construction:
CMC, UK partner may win RM700m LRT job. CMC Engineering Sdn Bhd and UK's Colas (CMC-Colas) may win a contract worth some RM700m for electro-mechanical (E&M) system for the Kelana Jaya light rail transit (LRT) extension line.
Tenders closed recently and Prasarana may award the contract by early May. (Source: Business Times)
Autos:
Vehicle sales up 12.7% in March. Total vehicle sales surged 12.7% to 63,265 units in March 2011 from 56,139 units a year earlier due to a rush for deliveries and invoicing by companies that have their financial year ending in March. (Source: The Star)
Mining:
Indonesian tin miner to list on Bursa Malaysia. Malaysia Smelting Corp Bhd (MSC) is proposing to list its Indonesian unit, involved in tin mining, on Bursa Malaysia's Ace Market. (Source: The Star)
KeyWest:
It has taken a lunge into the extraction of crude oil from marginal oilfields in Indonesia.
The JV with Indonesia based PT SA petroleum started extraction of crude oil from an onshore field.
The JV has started work on four oil wells and it has the mandate to extract crude oil from another four.
At the moment, its primary income comes from the provision of wholesale telecommunications and long distance telecommunications services for individuals and corporations.
For FY2010 ended Jan 31, its revenue shrink to rm76.6 million.
However, profit before tax at rm2.5 million. It expected venture into the brownfield oil fields to make up the loss of revenue and profit from the telecommunications business.
EON Capital/HL Bank:
The courts will rule in favor of Ng Wing Fai or Rin Kei Mei’s in the sale of EON Cap’s banking assets on April 28, 2011.
Axiata:
The issue of spectrum renewal fee for Robi Axiata Ltd in Bangladesh continued to overhang.
The exact amounts for the fees have not yet been determined, though at present it could be about US$400 million.
Hence, Axiata did not rule out a cash call from Robi. Nonetheless, management hopes to see a resolution in June 2011, given that the licences expire in November 2011.
L&G:
L&G’s remaining 43 acres (17.2ha) of freehold development land is in Sri Damansara, the jewel in the crown.
L&G’s net book value (NBV) for the land is carried at less than RM20 per sq ft. comparison, freehold commercial land in Mutiara Damansara is now valued at more than RM400 psf.
L&G had no borrowings and had cash of RM141.4 million as at Dec 31, 2010, with shareholders’ funds of RM248.2 million.
Proton:
Sources say the government is said to be setting up an advisory council to look into the proposed merger of national carmakers Proton Holdings Bhd and Perusahaan Otomobil Kedua Sdn Bhd (Perodua).
The advisory council would be tasked with coming out with the exact form the consolidation could take.
While several parties had earlier indicated that the merger plans between the two companies were off, Proton and Perodua were requested by government agencies to make a presentation to the Economic Council, headed by Prime Minister Datuk Seri Najib Razak, in Putrajaya in March 2011.
Sarawak elections: Back to the drawing board?
Potential pullback. Although Barisan Nasional (BN) secured more than two-thirds of the state assembly seats, the loss of 15 seats was higher than what political analysts had expected. In the May 2006 state elections where BN lost an additional 9.5% of seats, the KLCI was down 1.4% in the one week after the state elections. Price correction of Sarawak stocks was steeper, with politically linked CMS down 7.7%in one week.
The trend may be similar over the next few days post the 9.9% additional seat loss by BN last Saturday. We view any upcoming weakness as an opportunity to accumulate the Sarawak construction stocks – our pick is Hock Seng Lee (TP: RM2.30).
Results disappointed?
The BN led state government won 55 (77.5%) out of the total 71 seats in the 10th state elections held last Saturday. Chief Minister (CM) Taib’s party, PBB, retained 35 seats (unchanged) but the other two BN component parties had lost out with a total 15 seats falling to the opposition (versus 8 seats lost in the 2006 state elections) with DAP securing 12 seats (+6), and PKR 3 seats (+2).
While the BN led government was expected to continue into the new term, the loss of additional seats to the opposition was higher than the 2-3 additional seat loss which political analysts had predicted.
Market reaction the last time. The BN-led state government lost an additional 9.5% of total seats in the 2006 state elections. The broader KLCI was down 14 pts (-1.4%) in the one week after the state elections.
At the end of the first month, the KLCI had lost 54 pts (-5.8%), due also to external weakness with the DJIA consolidating 1.8% during the same period.
Sarawak stocks saw steeper price decline. Within one week of the May 2006 state elections, politically linked CMS had retraced 7.7%.Others like Encorp and Naim Holdings were down 7.9% and 2.4% respectively.
Sarawak-based construction stock HSL retraced 5.1%.
The bright side.
Commenting on last Saturday’s state elections, PM Najib said that the BN led government will “fulfill all its pledges to the people”. Besides leadership changes, we believe the promises include development and basic water, electricity and infrastructure needs.
On that premise, we continue to expect construction activities to step up,supported by Sarawak’s Corridor of Renewal Energy (SCORE)development programme. Tenders for 27 road packages mostly leading to upcoming new hydro-electric dam projects worth at least RM2b closed last year. We expect construction awards to pick up soon.
13th GE: Uncertainty in timing?
On whether BN’s two-thirds victory can be a gauge for the next general elections (GE), PM Najib was quoted as saying that “it is a yes and a no”. “Yes, because we can
maintain our momentum to win after the previous victories in various other by-elections held and it has inspired us,” but “No, because it is just a state election and does not reflect the situation of the country as a whole”.
Our interpretation of the PM’s remark is that the probability of a snap General Election this year has lowered somewhat compared with prior to the Sarawak State Election when the by-elections were swinging in BN’s favour.
STRATEGY: Penang- No More “Kiam Siap”
With Penang appearing to benefit from greater investments both local and foreign, we made a visit to my home state to see if the famed “kiam siap” stereotype of the typical island Penangite had changed. Visits to IJM Land, E&O and Hunza would seem to indicate a greater propensity for spending among Penangites thus benefiting these companies who are in the midst of high end property development projects and a retail mall development. While E&O and IJM Land are currently Not Rated, we have a Buy call on Hunza and note that our top property sector pick, SP Setia, is also exposed to the burgeoning Penang property market.
CONSTRUCTION (OVERWEIGHT) Sector News Flash: Iskandar Wants an MRT too
NEWS HIGHLIGHTS
Felda to list sugar business by July
CMP2 to further unlock value
RM30bn sukuk planned for MRT
Press Metal, partners sign deal with Sarawak Energy
Favelle units win jobs worth RM90mn
BToto to sell half its NFO?
Maybank says seeking BII divestment exetension
ECONOMIC HIGHLIGHTS
Indonesia: Keeps interest rate unchanged as inflation slows
Canada: Keeps key rate 1%, citing faster growth, dollar
UK: Inflation unexpectedly slows as stores cut food prices
UK: Retail sales plunged most on record in march, brc says
German: Inflation unexpectedly accelerated in march on oil
Spain: Underlying inflation slows for first time in a year
US: Trade deficit narrows less than forecast
Weekly Information Equity Flyer - 18.04.2011
With the market quiet due to the Sarawak state elections on 16 April, 1011, it is time to focus on stocks which have good rising revenue streams as well as better dividends yields. Therefore, in this edition of Weekly Equity Information Flyer, we highlight: -
1. Amway (Malaysia) Holdings Berhad (AMWAY, stock code: 6351)
Beginning with just five employees in a small office and warehouse facility in Jalan Ipoh in 1976, Amway Malaysia was one of the pioneers in the direct selling industry at that time.
Today, Amway Malaysia is the leading direct selling company in Malaysia with a core distributor force of 195,000 from all corners of the nation, making Amway a household name in Malaysia.
Amway has a very excellent upward revenue trend from 2002 to 2011, with a superb dividend yield of 7.33% with PE of 18.9x.
2. QSR Brands Berhad (QSR, stock code: 9415)
QSR dominates Malaysia's rapid expanding retail food industry. Headquartered in KL, the group operates: -
- over 270 Pizza Hut restaurants in Malaysia and Singapore
- over 620 KFC restaurants in Malaysia, Singapore, Brunei, Cambodia and India
- over 40 RasaMas restaurants in Malaysia and Brunei
The group also extensively involved in poultry production and processing, as well as a host of ancillary businesses such as vegetable farming, baking and sauce production. This makes the group Malaysia's first and only fully-integrated food operator.
QSR has firm upward trend from 2008 to 2011, with a good dividend yield of 4.11% with PE of 14.0x.
