Axiata Group Bhd
What’s Up? … dated Aug 2010
Axiata Group Bhd has set out a dividend policy to pay out at least 30% of its net profit beginning 2011 (which will be based on FY10 results) and progressively increase the payout ratio as time progresses.
This is (also) subject to many factors especially business prospects, capital employment, growth (prospects), and also consideration for non-recurring items and other factors considered relevant by the board.
The intention is that it will trend upwards. There will be no payments for 2010 and the actual amount is still subject to the board’s decision.
Axiata is now trying to match its peers — mobile service providers DiGi.Com Bhd and Maxis Bhd — which have high dividend payout ratios and are a favourite among local and foreign funds seeking steady dividends.
DiGi, in which Norway-based Telenor Asia Pte Ltd has a 49% stake, has pledged to pay out a minimum 80% of its annual net profit to shareholders. Maxis plans to pay out a minimum of 75% of its net profit to its shareholders this year.
Axiata will focus on organic growth this year and has not planned any acquisition or increased its stake in its subsidiaries or associate companies.
Apart from its wholly-owned subsidiary Celcom Axiata Bhd in Malaysia, Axiata also has other subsidiaries and associate companies that provide mobile telephone and telecommunication service spanning Asia.
Axiata owns 66.7% of ‘XL’ in Indonesia, 85% of ‘Dialog’ in Sri Lanka, 70% of ‘Robi’ in Bangladesh, 100% of ‘Hello’ in Cambodia, 19.1% of ‘Idea’ in India, 29.6% of ‘M1’ in Singapore, 49% of ‘MTCE’ in Iran (Esfahan), 89% of ‘Multinet’ in Pakistan, 19% of ‘Samart’ in Thailand and 24.4% of ‘Samart I-Mobile’ in Thailand.
Axiata Bhd meanwhile isn’t planning to bid for a Thai 3G license. The company has no current acquisition plans and will focus on organic growth.
Axiata also does not see any need to raise capital for its subsidiaries as “the capital expenditure for these subsidiaries can be sustained by their own cashflows”.
There is enough cashflow to finance the capital expenditure. The capital structure itself is comfortable to pay dividends. There are no requirements for capital injection or cash injections at least for the next one to two years (2011-2012)
Axiata also plans to divest its non-core assets or small assets but is “in no hurry to do so”.
Axiata saw improved performances from almost all its operating companies particularly from Celcom Axiata, its domestic unit, PT XL Axiata Tbk in Indonesia, Dialog in Sri Lanka, and Robi in Bangladesh.
Axiata’s net profit rose to RM576.8 million for the April-June period, versus RM526.8 million a year ago.
Celcom, the Malaysian arm of Axiata, saw year-on-year profit growth of 30 per cent to RM476 million. The company’s mobile broadband business also picked up, contributing nine per cent to revenue from five per cent a year ago.
Earlier Aug 2010, PT XL Axiata, it’s Indonesian unit, reported first-half net profit of 1.324 trillion rupiah, up 87 per cent from 706.4 billion rupiah in 2009.
Its operations in the sub-continent continued to consolidate and improve, although difficult market conditions weighed down the performance of Idea Cellular, a 20 per cent-owned associate.
Alcom
What’s Up? … dated Aug 2010
The strengthening of the ringgit and operating in a zero tariff environment are proving to be a challenge to Aluminium Company of Malaysia Bhd (Alcom).
In the past few years, there has been some structural changes in the economics of the business they are competing in. Among some of the major ones, tariffs have come down because of AFTA, so intra-Asean duties have dropped to zero. Also, duties between Asean and China has dropped to zero.
Now they are operating in a totally free environment compared to years ago when they had 20% to 25% tariff protection. That is one major factor putting pressure on its margins.
The strong ringgit had added pressure on its margins as the currency’s appreciation was not favourable for the export-oriented company.
Alcom’s other challenges include Chinese competitors which are able to procure raw material from China. The rest of the world procures aluminium at the London Metal Exchange. The China producers procure them at the Shanghai Exchange which has its own price mechanism. As a result, it has significant cost advantage to mills in China. This has been a major destablising move for us in the last few years.
The Chinese competitors also enjoyed government rebates when they exported goods. That rebate puts them in a favourable position, but there is a likelihood in the future that some of the rebates may be brought down. If that happens, then it is good for them as it will improve its competitiveness.
These challenges have put a dent on Alcom’s earnings in recent years, although its performance did improve in the latest financial year ended March 31, 2010 (FY10).
In FY10, it posted net profit of RM5.69 million, or 4.3 sen per share, on revenue of RM254 million, compared to a net loss of RM640,000 in FY09. Still, its net profit margin was just 2.2%.
Despite the weak financial performance, Alcom has been paying high annual dividends, 10 sen in FY10 and 12.5 sen in FY09, due to its strong balance sheet.
As at March 31, 2010, it had RM42.57 million in cash and no borrowings. Its net assets per share stood at RM1.46 as at March 31, 2010.
On exploring new markets, Alcom had always been looking at new markets and would try to diversify its geographic mix. They have been consistently looking at improving the mix of its business and are looking at the growth areas and targeting the high value-added segment of the market.
Going forward … The foreign exchange rate posed a challenge, but company had been managing the structural change in the economic condition by focusing a lot on continuous improvement activities.
If the ringgit continues to strengthen, it would continue to focus a bit more on the domestic market. The company currently exported over 60% of its products and due to the strengthening of the ringgit, it now sees opportunities to sell into some markets that were earlier not seen as too attractive.
Alcom’s main markets were in Asean, Middle East, Japan, Korea and Australia.
Alcom has allotted between US$7 million to US$8 million in capital expenditure for FY11, of which about US$4 million would go to purchasing machineries.
Sarawak Energy
What’s Up? … dated Aug 2010
Sarawak Energy Bhd, the state utility firm that will buy power from the Bakun dam, is expected to put in a fresh proposal for lower tariffs during the ramp-up period between 2011 and 2015.
Power usage in Sarawak is likely to take off only in 2015, it is asking for lower tariffs probably to mitigate the situation while trying to cement some of the investment deals from heavy users such as aluminium smelters.
They have gone nowhere close to cementing the deals although they have identified the large players.
The smelters are said to be willing to buy power at 12 to 13 sen per kilowatt-hour (KwH). Sarawak Energy is offering six to seven sen per KwH while Sarawak Hidro had asked for nine sen per KwH. Industry observers indicated that even if Sarawak Energy were to buy from Bakun at nine sen per KwH, pay an additional two sen per KwH for transmission costs, it can still earn one or two sen more.
At this juncture, the view at Sarawak Hidro Sdn Bhd, the developer and owner of the RM7.3bil dam, is that it must assess the situation over the 30-year concession period, where ultimately it will need to get to a market-driven scenario, be able to service its debts and obtain a reasonable rate of return.
If Sarawak Hidro agrees to the proposal for lower tariffs for the first five years, it will then have to assess the future tariff levels against its projected costs. It looks like the Federal Government will have to support the Bakun dam for the next few years while trying to recover its costs.
The power purchase agreement (PPA) talks between Sarawak Hidro and Sarawak Energy recommenced in late Aug 2010 amid the ongoing tussle over tariff rates. Sarawak Energy is believed to be sticking to the original offer of six to seven sen per KwH and is not giving up the water levy of one sen per KwH of electricity generated. In earlier talks, Sarawak Hidro had asked the state to drop the water levy, on the argument that dams like Pergau and Kenyir pay only 0.5 sen per KwH.
Sarawak Hidro had indicated it could charge a bit lower than nine sen per KwH provided it did not have to pay the water levy.
The state’s power usage, for which the current peak demand is around 1,100 MW, is expected to pick up in 2015 when the Sarawak Corridor of Renewable Energy (Score) projects come onstream. In fact, power demand from Score is initially projected at 500 MW in 2012, rising to about 2,600 MW by 2015.
Industries using smaller amounts of power, as in the poly silicon, ferro silicon and solar panel industries, are expected to be coming up under the Score project.
Most of the large, energy-intensive industries may materialise only in three to five years.
The state’s current capacity is 1,300 MW with an additional 1,770 MW of firm power available from the Bakun dam and 650 MW from the Murum dam by the end of 2013.
Although Sarawak Energy is confident of attracting the heavy users, it faces the problem of not being able to commit a proper tariff rate to them. Hence the urgency of finalising the PPA which will allow Sarawak Energy to sell the power to the aluminium smelters that have asked for slightly less than four US cents per KwH.
These PPA talks are held against a statement by Sarawak Chief Minister Tan Sri Taib Mahmud that the state would approach the Federal Government to buy over the RM7.3bil hydro-electric dam.
Earlier reports have indicated that Sarawak Energy was looking to lease or buy the dam, which it tagged at RM6bil minus the RM950mil compensation paid for a previously botched job at the dam and resettlement costs.
The Federal Government has borrowed RM5.75bil from the Employees Provident Fund and Pensions Fund for the Bakun dam project. Development costs for the six to seven packages of the Bakun dam have hit RM4.4bil and interest payments during the construction period is estimated to be RM1.1bil.
With the delay in the impoundment of the dam and full power offtake, revenue loss at Sarawak Hidro is projected at RM10mil per month starting from next year (2011). It is estimated that by 2015, the cost of the Bakun dam project would have escalated to RM8bil.
Tenaga
What’s Up? … dated Aug 2010
Tenaga had received a letter of offer from the Energy Commission (EC) on Monday to develop the first unit of a 1,000MW coal-fired power plant in Manjung. The plant will be located at the existing site of the 2,100MW Janamanjung coal-fired power plant.
The concession to develop the power plant has been awarded to Tenaga on a build, own and operate basis and the plant is to start commercial operations by March 1, 2015.
The award for the additional 1,000MW effectively will mean an expansion in capacity for Tenaga, the first for the dominant electricity supplier in more than six years.
The major criterion is to ensure that the electricity reserves margin does not drop below 20% by 2015. And that explains why ST has instructed TNB to ensure that the commercial operation of the new 1,000MW unit next to the latter’s Janamanjung plant begins by the first quarter of 2015. To meet that deadline, construction of the new unit is expected to start by early next year
The development cost for the new plant is expected to come in around RM3bil to RM4bil. This is derived from the industry’s estimate of around US$1mil–US$1.3mil for every 1MW added.
So far, TNB has yet to disclose its financing plan for the new capacity at its Janamanjung plant Nevertheless, TNB would likely resort to a 20%-25% equity and 75%-80% debt financing for the project. With a strong cash position of around RM6bil currently (Aug 2010), TNB can easily cover the 20%-25% equity funding required for the project.
In essence, financing the project should not pose any challenge to TNB. For instance, the Janamanjung is already operating debt-free and has been generating strong cash flow to the group. Profit after tax generated by the plant is around RM400mil to RM500mil each year.
Pocketing the 1,000MW expansion project is positive for TNB. The project would be earnings accretive to the company.
The present scenario (2010) points to the fact that the energy sector in the country will lean more towards coal-based and less of gas over the medium term.
Gas currently (2010) contributes around 60% of the country’s power generation mix, while coal contributes around 28%. The composition will likely change within the next five years (2011-2015) due to the shortage of gas supply and the planting up of more coal-fired power plants.
For one, the committed supply of gas from Petronas to the country’s power sector is only limited to 1,250 mmscfd (million standard cubic feet per day). The inability of the energy sector to secure gas supply beyond that volume poses an element of risk. And even if gas can be imported from elsewhere, buying the fuel at international prices will make gas-fired generation more costly than coal-generation.
At present (2010), gas supplied to power sector is sold to TNB at a subsidised price of RM10.70 per mmbtu (million British thermal units).
It is believed that the planned increase in coal-fired capacity is positive for TNB, as increased coal usage supports the setting of tariffs based on market pricing. This could also pave the way for an adjustment to the tariff rate based on coal reference price, and the long-awaited base tariff review.
TNB buys its coal supply at international market prices, which have been on an uptrend of late. For instance, TNB’s average coal cost for the third quarter ended May 2010 came up to US$92 (RM289) per tonne, compared with US$80 per tonne in the first quarter and US$82 per tonne in the second quarter.
Coal prices at Newcastle in Australia, the benchmark for Asia, remain volatile. Through July 2010, they showed an increase of 11% to average at US$96.94 per tonne. Prices are still trending up, but many do not think they will rise beyond US$100 per tonne at the end of the year (2010).
TNB hedges its coal supplies on a three-month forward basis. For the fourth quarter, it has bought forward its required coal supplies at US$95 to US$96 per tonne.
The question now (Aug 2010) is, with the 2,000MW expansion of coal-fired power plants within the next five years (2011-2015), what will happen to the first-generation independent power producers (IPPs)?
The 1st generation IPPs – which include YTL Power International Bhd’s Paka and Pasir Gudang power plants; Malakoff’s Segari and Port Dickson power plants; Tanjong plc’s Powertek; and Genting group’s Kuala Langat power plant under Genting Sanyen – account for around 4,115MW of generation capacity in Malaysia.
The power purchase agreements (PPAs) between TNB and the 1st generation IPPs will expire between 2015 and 2016. To recap, these PPAs have always been viewed to tip towards the IPP’s favour at the expense of TNB.
Nevertheless, industry observers believe the power plants operated by the first generation IPPs will unlikely be decommissioned. They believe the agreements with these IPPs will likely be renegotiated at a more equitable rate to TNB, resulting in the lifespan of 1st generation IPPs’ power plants be extended beyond the expiry date.
This move is also essential to maintain a healthy electricity reserve margin for the peninsula.
Meanwhile TENAGA Nasional Bhd proposed to give shareholders one new share for every four held. The bonus issue is to “reward shareholders” as well as improve the liquidity of the company’s shares in the market. TNB also planned to increase its authorised share capital to RM10bil comprising 10 billion shares from RM5bil currently to accommodate the bonus issue.
Industry observers say it is a sign that the management is confident in its ability to service a larger equity base or, in other words, in its capacity to generate more profits and give out dividends on all those shares in the future.
The bonus issue would not fundamentally change analysts’ earnings forecasts for TNB. Nevertheless, earnings per share and the company’s share price would naturally be diluted by 20% based on the one-for-four bonus issue after the completion date, which is expected to be in the first quarter of 2011
There will be more retail participation once TNB’s share price gets diluted as a result of the bonus issue.
TNB’s stock may also be re-rated on the back of robust free cash flow, positive company’s active capital management in terms of reducing debts and stepping up dividend payouts, as well as the impact of a fuel pass-through mechanism on the company in the longer term. TNB is also a resilient play that is well poised to benefit from stronger economic growth and potential tariff hike.