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PP 7767/09/2010(025354)

Malaysia Corporate Highlights


RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

R e su l ts / B ri e f i ng N o t e
21 April 2010
MARKET DATELINE

Tenaga Nasional Share Price


Fair Value
:
:
RM8.50
RM10.40
Demand Growth Turning Out Stronger Than Expected Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (TENAGA; Code: 5347) Bloomberg: TNB MK


Net Adj net Core EPS Net
FYE Turnover Profit Profit# EPS# Growth PER C.EPS* P/NTA Gearing ROE GDY
Aug (RMm) (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%)
2009 28,785.6 917.9 2,157.1 49.8 -7.4 17.1 - 1.4 0.7 3.6 2.1
2010f 29,857.6 3,062.9 3,062.9 70.7 42.0 12.0 68.3 1.3 0.7 11.3 3.3
2011f 31,264.7 3,505.5 3,505.5 80.9 14.4 10.5 75.3 1.2 0.6 11.9 3.8
2012f 32,742.0 3,999.8 3,999.8 92.3 14.1 9.2 80.6 1.1 0.5 12.5 4.3
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC # Excl EI and forex * Consensus Based On IBES Estimates

♦ 2Q core profit up 13% qoq ... Excluding forex gains of RM152m, TNB’s RHBRI Vs. Consensus
2Q results came in at the top-end of our and consensus estimates with Above
1HFY10 core net profit of RM1.6bn (+24% yoy) accounting for 54-55% of In Line
our and consensus FY10 net profit forecasts. 2H net profit, however, is Below
expected to be slightly weaker HoH mainly due to higher coal cost.
Issued Capital (m shares) 4,341.9
♦ … mainly on better generation mix. QoQ, revenue was flat, largely Market Cap (RMm) 36,906.5
Daily Trading Vol (m shs) 4.6
reflecting the flat electricity unit sales for Peninsular Malaysia. Core pre-tax
52wk Price Range (RM) 7.00 – 8.84
profit, however, rose 9% qoq mainly due to lower staff costs and IPP costs
(which largely reflects better generation mix where generation from gas Major Shareholders: (%)
Khazanah Nasional 35.7
and hydro accounted for 56% (vs. 1Q of 55%) and 6.8% (vs. 1Q of 5.8%)
EPF 16.7
respectively of total units generated). This, however, was partly offset by a
higher depreciation charge (+14.4% qoq) for the quarter.
FYE Aug FY10 FY11 FY12
♦ Dividend. TNB declared an interim gross DPS of 6 sen (2QFY09: 2 sen
EPS chg (%) 4.9 5.0 5.3
gross and 2 sen TE), below our expected 10 sen gross DPS. Nevertheless,
Var to Cons (%) 3.5 7.4 14.4
management reaffirmed its dividend policy (40-60% payout of free cash
flow) and we have retained our full-year gross DPS forecast of 27 sen on PE Band Chart
expectations TNB would make good the shortfall in its final dividend.
PER = 16x
♦ Briefing highlights. YTD (Sep ’09-Mar’10) unit sales growth stood at PER = 13x
PER = 10x
+8.5% yoy. Consequently, management has upped their FY10 demand
growth guidance to 7-8% (previously 2-3%). However, given the current
high spot prices for coal, guidance for FY10 average coal cost was also
raised to US$90/tonne (from US$85 previously). Finally, plans to import
electricity from Sarawak may not materialise given more pressing needs
from SCORE. Potentially, this could be a positive for both TNB (as it eases
concerns on the undersea cables project) and the IPPs (given the new Relative Performance To FBM KLCI
power opportunities and potential extension of 1st generation PPAs).

♦ Risks. Risks include: 1) slower-than-expected demand growth; 2)


depreciating RM; and 3) rise in coal prices. FBM KLCI

♦ Forecasts. We have raised our FY10 electricity demand growth Tenaga Nasional
assumption to +7% (+5.5% previously) but keep our FY11-12
assumptions of +5% p.a. unchanged. In addition, we have also raised our
FY10-12 coal cost assumptions to US$90/tonne flat from US$88, but this is
partly mitigated by a downward revision in our FY10-12 RM/US$ exchange
rate assumptions to RM3.40-3.20/US$ from RM3.50-3.30/US$. Overall, we
have raised our FY10-12 net profit projections by 4.9-5.3% p.a..

♦ Investment case. Following the earnings revision above, we have raised David Chong, CFA
our indicative fair value to RM10.40 from RM9.90, based on unchanged (603) 9280 2186
target CY10 PER of 14x. Fundamentally, the strong demand growth thus david.chong@rhb.com.my
far helps reaffirm our view that TNB is an excellent proxy to a recovering
economy and we thus, reiterate our Outperform call on the stock.

Please read important disclosures at the end of this report.


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Table 2. Tenaga Nasional Quarterly Results


QoQ YoY YoY
FYE Aug 2Q09 1Q10 2Q10 (%) (%) 1HFY09 1HFY10 (%) Comments
Turnover 6,907 7,338 7,389 1 7 14,321 14,727 3 2Q higher yoy mainly due to higher unit
sales, partly offset by the downward
revision in tariffs effective Mar ’09. Flat QoQ
largely reflecting flattish unit sales. 2QFY10
overall unit sales rose 12.8% yoy (vs.
1QFY10: +2.3% yoy and 2QFY09: -8.9%
yoy) following a recovery in unit sales for
Peninsular Malaysia, where unit unit sales
growth stood at +13.8%/+2.7%/-7.6% yoy
for 2QFY10/1QFY10/2QFY09 respectively.

EBITDA 2,021 2,079 2,276 9 13 3,613 4,355 21 QoQ improvement mainly due to better
generation mix where generation from gas
and hydro accounted for 56% (1Q: 55%)
and 6.8% (1Q: 5.8%) respectively of total
units generated. 1HFY10 higher yoy mainly
due to lower average coal cost of
US$80.7/tonne and appreciation of RM
(1HFY09: US$100.9/tonne).
Margin (%) 29.3 28.3 30.8 25.2 29.6
Depreciation (961) (921) (1,053) 14 10 (1,718) (1,974) 15 Higher yoy largely due to completion of PD2
project.
Net int.& other inc (135) (136) (125) (8) (7) (312) (262) (16) Weighted average cost of debt was stable at
5.26% for 1HFY10. Net debt at end-2QFY10
was slightly lower at RM15.3bn vs.
RM15.7bn as at end-1QFY10 (RM18.9bn at
end-2QFY09) as TNB’s cash continues to
pile up.
Associates 10 (4) 13 n.m. 23 18 8 (54)
Forex (120) (45) 152 n.m. n.m. (1,558) 108 n.m. Forex translation gain in 2QFY10 mainly due
to appreciation of ringgit vs. Yen
(RM3.81/100 Yen vs. RM3.93/100 Yen at
the end-1QFY10) while US$ was roughly
stable at RM3.40/US$.
Exceptionals - - - - -
Pre-tax profit 815 973 1,262 30 55 43 2,235 >100
Taxation (161) (276) (261) (5) 62 (329) (536) 63
Eff. tax rate (%) 19.7 28.3 20.7 770.3 24.0
Minority interest 20 9 (1) n.m. n.m. 17 7 (56)
Net profit 675 706 1,000 42 48 (270) 1,706 n.m.
Core net profit 795 751 848 13 7 1,289 1,599 24 Core net profits exclude forex.
Source: Company data, RHBRI

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Table 3. 2Q Results Highlights And Outlook


Positive factors Negative factors Outlook
Electricity 2Q overall demand rose 12.8% yoy Mar unit sales for Peninsular
demand (vs. +2.3% in 1QFY10 and -8.9% Malaysia grew 11.7% yoy, led by
in 2QFY09) mainly due to stronger the industrial (+13.7% yoy) and
unit sales for Peninsular Malaysia. domestic (+13.6% yoy) segments
2Q electricity unit sales for while unit sales for the commercial
Peninsular Malaysia jumped 13.8% segment rose 7.5% yoy. YTD (Sept
yoy. This was led by stronger ’09-Mar ’10), electricity demand
industrial demand, which surged was up 8.5% yoy. Consequently,
20.1% yoy (1QFY10: +0.3% yoy; management has upped their
2QFY09: -17.1% yoy), while both FY10 demand growth guidance
the commercial (+9.9% yoy) and to 7-8% from 2-3%.
domestic (+7.5% yoy) segments We have raised our FY10 demand
also saw stronger demand. growth assumption (for Peninsular
Malaysia) to +7% (from +5.5%)
but have retained our FY11 and
FY12 assumptions of +5% p.a..
Fuel cost 2QFY10 coal cost averaged around TNB estimates that it would need
US$82.2/tonne (vs. 1QFY10 of around 18.8m tonnes of coal for
US$80; and 2QFY09 of US$85.8) FY10 and guided for an average
cost of US$90/tonne for FY10 (vs.
US$85/tonne previously). 91% of
TNB’s FY10 coal requirement has
been secured with 54% at a fixed
price while another 37% is
indexed-linked. We have raised our
FY10-12 average coal price
assumptions to US$90/tonne from
US$88/tonne.

IPP The estimated full impact of


outpayments additional IPP payments for Jimah
is around RM1bn p.a. in FY11, vs.
RM800m in FY10.
Exceptionals
Forex RM/100 Yen appreciated to 3.81 Both RM/US$ and RM/Yen rates
from around 3.93 (as at end-Nov have appreciated post quarter-
’09) while the RM/US$ exchange ended Feb ’10 and are currently
rate was stable at 3.40 as at end- around RM3.19/US$ and
2QFY10 (vs. 3.39 as at end- RM3.47/100 Yen.
1QFY10). Consequently, TNB
booked in forex gains of RM152m
during the quarter vs. RM45m loss
for 1QFY10.
Balance Sheet And Cashflow
Net debt Net debt as at end-Feb ‘10 Total debt balance as at end-Feb
improved to RM15.3bn, vs. end- was largely stable at RM22.4bn
Nov ‘09 of RM15.7bn. (1QFY10: RM22.4bn, 2QFY09:
RM23.4bn) but cash has increased
further to RM7.1bn (end-Nov ’09:
RM6.7bn; end-2QFY09: RM4.5bn).
Capex 1HFY10 capex amounted to Management retained their capex
RM1.7bn (1HFY09: RM1.9bn), of guidance of around RM4.5-5bn.
which, RM846m was spent on Thus, we have retained our FY10-
distribution, RM440m on 12 capex assumptions of RM4.5bn
transmission and the balance on p.a.
generation and others.
Source: RHBRI

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♦ Briefing highlights.

o Management ups FY10 guidance on demand growth given strong unit sales thus far ... Mar unit sales
growth for Peninsular Malaysia slowed down to +11.7% yoy (Feb ’10: +21.4% yoy), with the slowdown mainly
due to the industrial segment (Mar ’10: +13.7% yoy vs. Feb ’10: +36.1% yoy). This was a result of the
Chinese New Year festivities as the time lag in billings for the industrial segment meant that Feb’s electricity
demand for the industrial segment was only reflected in Mar’s numbers. Meanwhile, electricity demand for both
commercial (Mar: +7.5% yoy) and domestic (Mar: +13.6% yoy) segments remained strong. Looking ahead,
while we expect electricity demand to remain healthy, the growth rate would likely slow ahead as demand
would now be coming from a higher base. Nevertheless, on the back of the strong YTD figures, management
upped their FY10 demand growth guidance to 7-8%, from 2-3%. Consequently, we have also raised our FY10
demand growth assumption to +7% from +5.5%, although we keep our FY11 and FY12 annual demand growth
assumptions unchanged at +5%. While our revised FY10 demand growth assumption implies a GDP multiplier
of 1.56x, i.e. above the average multiplier of 1.2x since 2000, we see potential upside to our FY10 GDP forecast
of 4.5%.

o … but guidance for coal cost also raised. Total coal consumed in 1HFY10 was 8.4m tonnes, at an average
price of US$80.7/tonne (1HFY09: US$100.9/tonne). For the full-year, TNB estimates that it would need around
18.8m tonnes of coal and revised its average cost guidance to US$90/tonne (vs. US$85 previously). This would
imply that 2H coal cost could average around US$97-98/tonne, partly mitigated by the strengthening of the RM
against US$. 91% of TNB’s FY10 coal requirement has been secured with 54% at a fixed price while another
37% is indexed-linked. We have raised our FY10-12 coal cost assumptions to US$90/tonne flat from
US$88/tonne, but this is partly mitigated by a downward revision in our FY10-12 RM/US$ exchange rate
assumptions to RM3.40-3.20/US$ from RM3.50-3.30/US$.

o Still no news on tariff review. At this juncture, management was unable to shed more light as to when the
tariff review would take place. Recall, TNB had mentioned previously that they had submitted a request for a
base tariff review (“low single-digit” reivision) and this would help cover the higher capacity payment for Jimah
going forward. We estimate that a 1% hike in tariffs would raise our FY11-12 earnings projections by around 6-
7%.

o Plans to import electricity from Sarawak now unlikely to materialise ... According to management,
plans to import electricity from Sarawak (e.g. Bakun) now appear unlikely to materialise given that the state
needs the capacity from Bakun and Murum to develop SCORE. Hence, alternative plans would now need to be
considered, and quickly as the new capacity would need to be ready by 2015 (which was the original deadline
for completion of the first undersea cable). In total, management estimates that another 6,000MW would be
required on top of the current existing capacity and additional capacity from the Ulu Terengganu (250MW) and
Ulu Jelai (372MW) hydroplants. Part of this should be met if the plan to expand capacity at Manjung (by
another 2,000MW) goes through as this would be a replacement for the earlier planned import of electricity
from Bakun.

o … but a potential positive for power players? Potentially, the above could be a positive for both TNB and
the IPPs. For TNB, the planting up of new capacity in Peninsular Malaysia itself could help ease concerns
regarding the undersea cables project (e.g. cost). As for the IPPs, another 4,000MW in capacity would be
required (assuming the expansion at Manjung goes through) and this could provide opportunities for the IPPs
to expand their domestic portfolio. Returns however are likely to be lower this time round as TNB thinks the
Government is unlikely to take the direct negotiation route as in the past. In addition, while the shortage in
capacity could strengthen the case for an extension of the 1st generation PPAs, gas supply, however, could be
an issue (above 6,000MW required expected to be met by new coal-fired plant-ups).

Forecasts And Recommendation

♦ Forecasts. After taking into account the revisions made to our assumptions on FY10 electricity demand growth,
coal costs and exchange rates, we have raised our FY10-12 net profit projections by 4.9-5.3% p.a..

♦ Fair value raised, Outperform call reiterated. Following the earnings revision above, we have raised our
indicative fair value to RM10.40 from RM9.90, based on unchanged target CY10 PER of 14x. Fundamentally, the
strong demand growth this year helps reaffirm our view that TNB is an excellent proxy to a recovering economy and
we thus, reiterate our Outperform call on the stock.

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Table 4 : Profit Forecasts Table 5 : Forecast Assumptions


FYE Aug (RMm) 2009 2010f 2011f 2012f FYE Aug 2010f 2011f 2012f
Turnover 28,785.6 29,857.6 31,264.7 32,742.0 Average tariff (sen/kWh) 31.2 31.3 31.3
Growth (%) 23.4 3.7 4.7 4.7 Demand (%) – excl. Exports/LPL 7.0 5.0 5.0
Total electricity sales (GWh) 93,243 97,569 102,111
EBITDA 7,260.4 8,378.1 8,971.8 9,509.5 % change 6.2 4.6 4.7
Margins (%) 25.2 28.1 28.7 29.0
Avg coal price (US$/tonne) 90 90 90
Dep/amort (3,561.5) (3,637.3) (3,667.9) (3,683.1) Coal cost/Total fuel cost (%) 38.9 43.4 47.7
Net int inc/exp (949.7) (918.9) (909.8) (829.5) Coal cost/Op cost + dep (%) 15.0 17.3 19.5
Associates 33.1 44.0 44.0 44.0
Investments 0.0 0.0 0.0 0.0 Source: RHBRI
Forex (1,239.2) 0.0 0.0 0.0
Exceptionals 0.0 0.0 0.0 0.0
Pre-tax profit 1,543.1 3,865.8 4,438.1 5,040.9
Tax (690.1) (893.1) (1,036.1) (1,158.7)
Minorities 64.9 90.2 103.5 117.6
Net profit 917.9 3,062.9 3,505.5 3,999.8
Core net profit 2,157.1 3,062.9 3,505.5 3,999.8
Source: RHBRI

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank
(previously known as RHB Sakura Merchant Bankers). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions and
information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be contrary to
opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be construed as an
offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any manner whatsoever
and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons may from time to time
have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of
persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy
will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts any liability for
any loss or damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing
investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB Group
may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity securities or loans
of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other
services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based upon
various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher
risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended securities,
subject to the duties of confidentiality, will be made available upon request.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the
actions of third parties in this respect.

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