PP 7767/09/2010(025354)

Malaysia Corporate Highlights

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

New s Upda te
31 May 2010
MARKET DATELINE

Tenaga Nasional Share Price

Fair Value
:
:
RM8.22
RM10.40
Cutting Subsidies For A Better Tomorrow 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 16.5 - 1.4 0.7 3.6 2.2
2010f 29,857.6 3,062.9 3,062.9 70.7 42.0 11.6 66.3 1.3 0.7 11.3 3.4
2011f 31,264.7 3,505.5 3,505.5 80.9 14.4 10.2 74.4 1.2 0.6 11.9 3.9
2012f 32,742.0 3,999.8 3,999.8 92.3 14.1 8.9 83.9 1.1 0.5 12.5 4.5
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC # Excl EI and forex * Consensus Based On IBES Estimates

♦ Measures for subsidy cuts unveiled ... Minister in the Prime Minister’s
Issued Capital (m shares)
Market Cap (RMm)
4,344.3
35,710.2
Dpeartment, Datuk Seri Idris Jala, unveiled several measures last week
Daily Trading Vol (m shs) 4.8
that, if implemented, could help cut the subsidy bill by RM103bn over the
52wk Price Range (RM) 7.20 - 8.84
next 5 years. Not surprisingly, reducing gas subsidies to both the power
and manufacturing sectors was identified as one of the measures. Major Shareholders: (%)
Khazanah Nasional 35.7
♦ … which includes raising gas price to the power sector. Under the EPF 17.5
proposal, gas price to the power sector would see an initial increase of Amanah Saham B’putra 9.8
RM4.65/mmbtu to RM15.35/mmbtu (+43.5%). Thereafter, the price of
gas will be raised by a fixed rate of RM3/mmbtu every six months, FYE Aug FY10 FY11 FY12
regardless of market price fluctuations. The price of gas is expected to EPS chg (%) - - -
reach market price by 2015, barring which, an adjustment would be made Var to Cons (%) 6.6 8.7 10.0
to bring the prices to parity (market price refers to LNG import value price
and projected to reach RM38/mmbtu by 2015). PE Band Chart

♦ Electricity tariffs allowed to rise as well. To compensate TNB for the PER = 16x
PER = 13x
higher gas price, electricity tariffs would be adjusted upwards by 2.4 PER = 10x
sen/kWh for the initial RM4.65/mmbtu increase in gas price. Thereafter,
TNB will be allowed to raise electricity tariffs by 1.6 sen/kWh every six
months to cater for the corresponding increase in gas price. The new
electricity tariffs, however, would not impact household consumers with
monthly electricity consumption of < 200kWh.

♦ Impact. At this stage, we are uncertain if the upward adjustments to

electricity tariffs means that tariffs for the various sectors (and bands) are
raised by a flat rate or tariffs are adjusted such that the average Relative Performance To FBM KLCI
electricity rate would rise by the abovementioned figures. In the absence
of further details, our model appears to suggest that the initial electricity
hike may not be sufficient to compensate TNB for the proposed initial FBM KLCI
increase in gas price (up to 7% impact to FY11 net profit, assuming
average tariff rises by 2.4 sen/kWh). Based on our model, TNB requires
an average tariff increase of 2.63 sen/kWh to offset the RM4.65/mmbtu Tenaga Nasional
increase in gas price. As for the semi-annual adjustments to gas price and
electricity tariffs, our model suggests that the impact is not too significant
to TNB, assuming average electricity tariff rises by 1.6 sen/kWh.
Notwithstanding the above, we highlight that our forecasts are sensitive
to a number of variables and assumptions (e.g. thermal efficiency) and
we would need to check with management for further details.

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

depreciating RM; and 3) rise in coal prices.

♦ Forecasts. No change to our earnings forecasts at this juncture.

♦ Investment case. Our indicative fair value of RM10.40 is unchanged and

is based on target CY10 PER of 14x. Outperform call on the stock David Chong, CFA
maintained. (603) 9280 2186
david.chong@rhb.com.my

Please read important disclosures at the end of this report.

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Table 2 : Proposed Gas Price Revisions

2010 2011 2012 2013 2014
RM/mmbtu RM/mmbtu RM/mmbtu RM/mmbtu RM/mmbtu

Jan 10.70 A+3 A+9 A + 15 A + 21

Jul A A+6 A + 12 A + 18 A + 24
Source: Pemandu

Table 3 : Profit Forecasts Table 4 : 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

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

Stock Ratings

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 31 May 2010

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.

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securities, subject to the duties of confidentiality, will be made available upon request.

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the actions of third parties in this respect.

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