TNB ... Feb10

1QFY10 Results Review

• Tenaga showed a marked improvement in its 1QFY10 results, with net profit at RM706.5m compared to a net loss of RM944.1m a year ago. After removing the effect of translation loss which amounted to RM45.4m, 1QFY10 net profit (before translation loss) of RM751.9m was in line with our expectation, accounting for 27% of our full-year projection.

• For the quarter under review, the Group registered electricity unit growth across all major sectors, namely industrial, commercial and domestic, which resulted in the overall demand growth of 2.7% yoy in Peninsular Malaysia. Revenue, however, fell slightly by 1% yoy to RM7.3b largely due to the tariff adjustment which took effect in March 2009.

• Despite the decline in revenue, operating profit grew an encouraging 39.3% yoy to RM1.2b, mainly helped by the 11.3% yoy reduction in generation costs. Average coal cost for Tenaga in 1QFY10 was USD80/mt vs. USD113/mt a year ago. Consequently, EBITDA margin rose to 29.5% in 1QFY10 from 22.2% in 1QFY09.

• Meanwhile, Tenaga’s balance sheet continues to strengthen with NTA/share rising to RM6.08 in 1QFY10 from RM6.00 in 4QFY09. Net gearing too, improved to 0.60x from 0.63x during the same period.

• No dividend was declared for the quarter under review.

• While the challenges of rising opex and fluctuation in fuel costs remain, we now turn positive on the Group’s outlook, underpinned by the expected expansion in electricity consumption. The 2.7% yoy electricity unit increase in 1QFY10 was the second sequential growth quarter in Peninsular Malaysia. To recap, electricity consumption contracted 7.6% yoy and 4.7% yoy in 2QFY09 and 3QFY09 respectively, before rebounding to a growth of 0.6% yoy in 4QFY09 and 2.7% yoy in 1QFY10. We understand from management that electricity usage in the month of December 2009 continued to rise 7.6% yoy. We view this development favourably. With the gradual pickup in the domestic economy, we expect the rising uptrend in demand growth to prevail into the remaining quarters of FY10. With no surprises in the 1QFY10 results, we maintain our FY10 net profit projection at RM2.7b.

Recommendation
Against the backdrop of improving electricity consumption and less volatile coal prices, we upgrade our recommendation to Buy but retain our fair value of RM8.86, which is derived from a DCF-based earnings model. Following the recent pullback in share price, which is broadly in line with the fall in the FBM KLCI index, we view Tenaga’s present valuation, at FY10 PER of 12.7x, as more palatable especially compared to its 5-year historical median PER of 20x.