Tenaga Nasional Share price: RM6.03 Target price: RM5.40 (from RM5.73)

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.