OSK Research said there was still value in Tenaga Nasional Bhd (TNB) although its shares reached a five-year low as investors feared the company would not be granted a fuel pass-through mechanism in the face of record coal prices.
“Our analysis reveals that there is value particularly if coal prices ease below US$100 (RM318) per tonne and a pass-through mechanism is set one year from now.
“We believe margin erosion over the next six quarters will spur the government to award a pass-through mechanism and it is prudent to take position in TNB now with most bad news largely priced in,” said the research house.
OSK Research, which re-initiated its coverage on TNB with a buy, has pegged its shares with a discounted cash flow (DCF)-based fair value of RM9.05.
Based on our sensitivity analysis, a lack of a pass-through will mean our fair value is reduced to RM8.85.
“Every US$1 rise in coal prices will cut TNB’s core net profit by RM27 million if there is a pass-through and RM34 million if there isn’t. It will take an average of US$107 coal without a pass-through for us to downgrade TNB. With a pass-through, US$147 coal is the threshold. Recommend to buy now as bad news largely priced in,” it added.
With coal prices above the US$110 per tonne level, TNB would face further cost pressures in FY09. For now, the research house is forecasting its FY09 profit to drop by 32% with coal prices at US$95 per tonne.
“Given continued margin erosion, we forecast that the government will grant a fuel pass-through mechanism to TNB by 4QFY09 or June 2009 although this may be in a form of a variable subsidy, boosting FY10 earnings,” said OSK Research.
Although it forecasted six quarters of poor profit, the research house was still maintaining a buy call as it believed most of the negative news has been priced in.
“We believe the investing community has forecasted US$120 per tonne coal with no APM (automated pricing mechanism) to value TNB. As such, further selling should be somewhat muted. Once the selling pressure stops, TNB should be ripe for a rebound and we believe now is as good a level as any,” added OSK Research.
Tenaga yesterday closed 10 sen higher at RM6.70 with about 11.48 million shares traded.
No comments:
Post a Comment