MISC Tenaga


  • Business
  • Saturday, 22 Feb 2003

MAS 

Amid doubts over the security and safety of air travel triggered by the Sept 11 incident, the airline industry globally has been facing tough times. Many large US-based airlines have been haemorrhaging on the back of low air travel, sliding yields coupled with huge debt burden. 

National carrier MAS, which has been tottering over the past five years, is undergoing a widespread asset unbundling exercise to stop the bleeding and address its debt woes. For the second quarter ended Sept 30, 2002, the company returned to the black to post a net profit of RM1.12 million as opposed to a loss of RM236.91 million in the same quarter of the previous year.  

Sales rose to RM2.39 billion from RM2.18 billion on the back of a higher load factor and improvement in passenger yield. The company is due to announce its third quarter results any time soon which some expect to have some pleasant surprises. 

It is, however, hard to dismiss concerns of rising oil prices on MAS as over 20 per cent of its total cost stems from fuel and given that it spends some RM1.7 billion per annum on fuel alone.  

According to AmResearch, for every US$1/barrel price hike, it would pinch MAS' earnings by RM70 million to RM80 million. According to estimates, the local research house says the airline's average oil price in FY01 and FY02 stood at US$26 per barrel and US$24 per barrel respectively. 

Historically, over the last 10-12 years, even with a sharp spike in oil prices, the level has always managed to be maintained at an average price of US$26.  

To buffer it from an adverse impact, the company has in place a fuel hedging policy. AmResearch says the company has so far hedged about 20 per cent of its fuel needs for financial year 2004.  

“We believe management holds the view that when war happens, oil prices might start to fall as the market has already discounted the 'war factor' the past few months,” it says.  

“In the short run, MAS should be alright. Perhaps in the longer term, if this problem continues to persist, then MAS will feel the heat,” says one analyst. 

Meanwhile, AmResearch seems rather upbeat over the airlines. It has revised upwards its FY04 and FY05 earnings forecasts to RM390.6 million and RM485.7 million respectively in view of likely higher sales from the buoyant Asian region, stronger cargo earnings and continuing cost cutting measures undertaken by management.  

However, it cautions that higher jet fuel prices and slower passenger and cargo traffic in the event of war could dampen earnings over the next few months. 

In the case of MISC, a shipping analyst is adamant that the rising oil prices will cause minimal harm to the company’s bottomline. He believes that MISC’s business will be driven by the Liquefied Natural Gas (LNG) business at least for the next three years. 

“MISC will not be 100 per cent impacted. Bear in mind that many of its ships and LNG tankers are chartered on a long-term basis,” says the analyst. 

MISC dominates the LNG transportation business in Malaysia, having secured long-term charter contracts from parent company Petronas. The long-term charter contracts basically provide MISC with a captive earnings base, providing an important cushion during economic downturn. 

Malaysia is the third largest exporter of LNG in the world, with about 17 per cent market share. MISC currently has about 13 LNG tankers, making it one of the largest operators of LNG tankers. 

Typically, when a ship is chartered, the client absorbs the fuel cost. Also, its LNG tankers run on gas as its source of energy. 

For the first half ended Sept 30, 2002, MISC registered a lower net profit of RM572.36 million compared to RM775.75 million in the same quarter of the previous year. Revenue also decreased to RM2,690.53 million from RM2,810.2 million. 

The global economic slowdown and over capacity resulted in lower freight rates, especially for the liner business. Operating conditions remained tough in the second quarter of 2003, as the anaemic economy and higher fuel costs dampened freight rates. Except for the LNG segment, a sustained recovery is hard to come by until mid-2003. 

Nevertheless, MISC’s cashflows are rather secure due to high proportion of time charters and contract of affreightment in the LNG, chemical and petroleum segments. These were secured well ahead of the slide in freight rates. 

The national utility is expected to feel some form of pressure from rising oil prices, although the extent of the impact is not expected to be worrisome. This is because a bulk or 80 per cent of its energy generation comes from gas whose price is fixed under a Gas Supply Agreement (GSA) at RM6.40 per mmbtu.  

“Without the GSA, needless to say the fuel cost would have gone up and the impact on Tenaga more severe. Naturally, when oil prices go up, gas prices follow suit,” says an analyst.  

The GSA between Tenaga and Petronas had expired two years ago but has been extended indefinitely. The biggest motivation to keep gas price at the fixed level is to avoid higher electricity charges being passed onto consumers. If the gas price was revised upwards, it is generally perceived that this would be inevitable. 

He feels that Tenaga is not in any serious trouble because the government is keen to maintain electricity at current rates. Currently, the remaining 10 per cent to 15 per cent of Tenaga’s energy comes from coal, while a minimal 2 per cent to 3 per cent comes from oil. 

“Evidently, Tenaga will need to be cautious, because a percentage of its energy source comes from oil. Still, the problem is controllable,” he says. 

A source within the company says: “ Actually, it's true that TNB wouldn't be affected much as our oil consumption is low. Perhaps those affected would be the transportation sector, where gasoline and diesel are the most dominant fuel used,” 

The analyst does not foresee Tenaga being bogged by the rising oil prices at least for the next two years. 

For its first quarter ended Nov 30, 2002, Tenaga registered a net profit of RM663.20 million – almost three times higher than the previous quarter (4Q02) and 13 per cent lower from the same period a year ago. Revenue increased 5.6 per cent to RM4.05 billion from RM3.81 billion.  

However, AmResearch says Tenaga may feel the cost pressure in the next 18 to 24 months on the back of rising reserve margin, higher overheads and capacity payments to independent power producers. The research house also expects marginal generation cost to rise as the utility shifts its generation mix towards coal.  

This is because given that gas is subsidised by the government, it actually costs more for the power plant in the country to generate a unit of electricity using coal. “It costs 13-14 sen to generate each KWh from coal compared to 12 sen from gas. The high oil prices currently will also be a factor, albeit small,” it continues. 


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