Written by Surin Murugiah
Wednesday, 23 December 2009 12:17
KUALA LUMPUR: RHB Research Institute Sdn Bhd has maintained its overweight recommendation on the power sector and said the key near-term focus for the sector and TENAGA NASIONAL BHD [] (TNB) would be on the upcoming tariff review.
While the tariff review would likely dominate Tenaga's (Fair Value = RM9.50) near-term share price performance, fundamentally, Tenaga was an excellent proxy to a recovering economy, it said.
"As for the IPPs, between Tanjong Plc (FV=RM19.10) and YTL POWER INTERNATIONAL BHD [] (FV=RM2.10), we prefer the former as valuations are cheaper.
It said a base tariff review was past due for Tenaga and all the more important this time round as TNB would need to meet rising capacity payments for Jimah Power.
"A tariff hike would also help ensure a minimum return to shareholders. We have not factored in any tariff revisions in our earnings model and project FY10 ROA of 4%, below Tenaga's weighted average cost of debt of 5.2%.
"In order for ROA to be raised by one percentage point, we estimate that a 4% hike in the base tariff would be required, which would also raise our FY11 earnings projection by around 26%," it said.
The research house said a tariff increase would also help Tenaga cover rising fuel costs.
"We think gas prices should not be an issue for Tenaga as tariffs would be adjusted accordingly to accommodate the higher or lower gas prices. For every 10% change in gas price, we estimate tariffs would need to be adjusted by just 2.6% to neutralise the impact.
"As for coal, our sensitivity analysis suggests a US$10 per tonne change in our average coal cost assumptions of US$88 per tonne for FY10-12 would impact Tenaga's earnings by around 12%. In order to cover this increase, we estimate a tariff revision of 1.9%. A strengthening ringgit (against the US dollar) would also help cushion some of the impact," it said.
RHB Research said the long-awaited National Energy Plan could be unveiled next year