Tenaga's worries

FOREX losses, debts and falling demand pose challenges for the utility giant.

UTILITY PROVIDER TENAGA Nasional Bhd foresees better earnings for its current financial year as demand for electricity has started to pick up.

Though profits may be lower than that for financial year (FY) 2008, president and CEO Datuk Seri Che Khalib Mohamad Noh is confident they will not be very much lower.

`We should still be able to record a reasonably healthy profit but obviously lower than that of 2008. But we don't think we will fare badly compared to 2008 because when the demand for electricity came down, we immediately implemented what we call Operations Trim X, a programme introduced across the organisation to trim excesses, wastage and unnecessary costs,' he says.
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Tenaga posted a net profit of RM2.6 billion for FY2008 compared to RM4.068 billion for FY2007. The dip in electricity demand was felt particularly during second quarter 2008, ie, from November to February, when industrial demand dropped due to the festive and year-end holidays as well as the global economic slowdown.

However, demand started to pick up in March this year and Che Khalib expects it to be sustained. Tenaga currently faces a demand reduction from Peninsular Malaysia by about 3.2%.

`In terms of revenue, of course it will be higher because of the tariff increase that came in July 2008. But we believe that in terms of units sold, it will be reduced compared to 2008, but will not go lower than 3.2%. If we are lucky, it will even be closer to the 2008 numbers,' he tells Malaysian Business.

Tenaga turned in a net profit of RM674.6 million for its second quarter ended Feb 28, 2009 - a fall compared to the RM1,063.2 million recorded in the previous corresponding period, but a surge over the loss of RM944.1 million suffered in the first quarter.

For the first half ended Feb 28, 2009, Tenaga posted a net loss of RM269.5 million, compared to a net profit of RM2.578 billion in the previous corresponding period. Operating profit was RM2,051.7 million, compared to RM2,780.4 million in the previous corresponding period.

It recorded a foreign exchange (forex) translation loss of RM1,536.7 million for its first half 2009, compared to a RM522.8 million gain in the previous corresponding period.

Che Khalib says forex translation is another major concern for Tenaga apart from demand for electricity. Of its total debt, which is close to RM23 billion, 27.5% is made up of US$-denominated loans, 22.8% yen- denominated and the rest in ringgit.

Tenaga is trying to retire all its US$-denominated bonds. `It will take some time to address this problem. In future, our loans will all be in ringgit,' he says.

Research houses also expect stronger performance from Tenaga in its second half ending Aug 31, 2009. Standard & Poor's (S&P) forecasts a 2% rebound for Tenaga for FY2010 on the back of a gradual recovery in the global economy.

`We also assume that the government will adopt a more sympathetic stance toward Tenaga with an electricity tariff review now being performed on a half-yearly basis to adjust for changes in Tenaga's operating costs,' S&P said in a recent note.

S&P has upgraded its recommendation on Tenaga to a `buy' from `hold' and raised its 12-month target price for the stock to RM7.50 from RM6.50 on an improved earnings outlook.

`Coal prices are expected to remain relatively benign after coming off from the all-time high in 2008 as a result of the global economic downturn. The change in generation mix toward gas-fired plants also helped to enhance Tenaga's operational margins,' said S&P, which estimates Tenaga's 2009 price-earnings (PE) at 20.6x.

OSK Research also expects a stronger second half for Tenaga following the fall in coal costs. Apart from that, `the full effect of the reduction in gas prices from RM14.31 per mmBTU to RM10.70 per mmBTU will also be felt from the third quarter onwards. With the strengthening ringgit, we expect Tenaga to record forex gains going forward,' it said in a research note.

OSK's longer term discounted cash flow fair value, however, is unchanged at RM8.40. Its 2009 PE forecast for Tenaga is 11x and it maintains its `buy' call on the stock.

Going forward, Che Khalib says Tenaga will continue to look for opportunities in the power sector abroad. He says equipped with the right people now, Tenaga is ready to face challenges arising on the international scene.

The utility giant has been busy with projects in the Middle East, particularly Saudi Arabia. Among them is a power plant in Jeddah, which is about 95% completed and expected to come on stream by the middle of this year. Tenaga's investment in the US$82.2 million project is through consortium Saudi-Malaysia Water and Electricity Company Ltd.

Tenaga is actively looking for opportunities to bid for more projects in the Middle East and has established a working cooperation with the bin Laden Group to look at power plant opportunities in the region. It is also working with a company in Saudi Arabia to set up a training centre there.