TNB viewed positively post-elections


Tenaga Nasional Bhd

By Kenanga

Rating: Outperform

Target Price: RM8.05

TENAGA Nasional Bhd (TNB) is clearly an election play since a tariff review is imminent post-general election.

The Government is likely to continue with the compensation structure which is the fuel cost-sharing mechanism until the tariff hike takes place and this will ensure earnings stability for TNB.

When the new gas supply from the Malacca re-gassification terminal comes into place in the second quarter, a new set of fuel cost pass-through mechanisms will address its rising gas cost. TNB remains as “outperform” with an unchanged target price of RM8.05 per share, based on 13 times financial year 2013 price to earnings.

It is now one of our top picks for our second quarter 2013 strategy series. With the pressure to raise tariff getting higher as the Government/Petronas/TNB will not be able to absorb higher fuel costing continuously, a tariff hike is highly likely post-election.

The share price of TNB is likely to react positively in the event of a tariff review based on past records. Since 2006, the tariff rates of Peninsular Malaysia have been revised four times (three upward revisions and one downward revision).

The share price of TNB responded positively then except for the July 2008 tariff revision when the share price was fairly flattish.

Records show that the share price soared 3%-9% immediately the day after the announcement to as high as 8%-10% within a month.

As such, we expect the share price to likely rally higher again this round. The earnings risk profile for TNB has changed to be less sensitive towards fuel price changes since the first fuel cost compensation scheme was introduced in December 2011.

Under the fuel cost sharing mechanism, theGovernment, Petronas and TNB will share equally the differential fuel cost incurred mainly due to the gas supply shortages.

To recap, the company received its first RM2.05bil compensation (for the period of January 2010-October 2011) in December 2011 and in financial year 2012, the group received RM1.44bil in compensation.

This is to ensure a more sustainable operation and cash flow for TNB to continue its operations.

The Energy Commission has a timeline to implement the incentive-based regulation as a structure. One of the major assumptions of this structure is a fuel-cost pass-through mechanism, which supports our positive view on TNB.

We also look forward to further updates on the stabilisation fund, which will help mute the full impact of any tariff hikes on the customers.

Our positive view is also reflected in the rise in the foreign shareholdings of the shares to 15%, which is considered high since the foreign shareholdings remained below 12.6% for the last two years.

We reaffirm our “outperform” rating on TNB.

WCT BHD

By Alliance Research

Rating: Neutral

Target Pricing: RM2.48

WE view the termination of the civil suit by Meydan against the WCT-Arabtec joint venture (JV) positively. WCT's JV partner on the project, Arabtec has agreed to terminate all arbitration proceedings against the project's employer, Meydan LLC. However, the arbitration proceedings between WCT and Meydan will continue.

The Dubai Court terminated the civil suit initiated by Meydan against the JV. This is in view of the binding arbitration agreement between Meydan and the JV. Meydan has nonetheless filed an appeal to the court's decision.

Back in September 2007, a 50:50 JV between WCT and Arabtec was appointed by Meydan as the main contractor for the Nad Al Sheba Racecourse in Dubai for 4.61 billion dirham (RM3.92bil).

In Jan 2009, Meydan terminated the JV as the contractor on grounds of work delays. An arbitration proceeding was subsequently initiated by the JV on Meydan.

In June last year, Meydan filed a counter claim (civil suit) of 3.5 billion dirham (RM2.98bil) against the JV.

When the project was awarded, there was a legal and binding clause, which stipulates that any dispute in relation to the contract must be resolved by means of arbitration only. As such, we are not surprised that the Dubai court terminated the civil suit initiated by Meydan against the JV.

We are curious as to why WCT's JV partner, Arabtec, would want to terminate its arbitration proceedings against Meydan.

When the arbitration commenced, the JV filed an 1.69 billion dirham (RM1.44bil) claim against Meydan comprising completed but unpaid works, nominated subcontractors dues, interest cost and loss of reputation.

Although Arabtec has dropped out of the arbitration proceedings against Meydan, this does not preclude WCT from pursuing their rights to the arbitration claims, which we understand that it will continue to do so.

It is possible that Arabtec and Meydan may have managed to achieve an amicable solution to the long drawn saga.

If this is the case then perhaps a similar episode can be expected for WCT.

WCT has made a RM80mil provision in financial year 2008. Management views this as sufficient and guided that they do not expect more provisions to be made in relation to this project.

If WCT comes on top of the arbitration proceedings or an amicable solution is reached, then it is possible that there could be some write backs.

We maintain the “neutral” rating with a RM2.48 target price based on fully diluted sum of parts which tags a 12 times price to earnings target to construction earnings. Our target implies a financial year 2013-14 price to earnings of 12.5 times and 11.7 times. We believe that further share price upside is unlikely until post general election.

Dialog Group Bhd

By CIMB Research

Rating: Outperform

Price target: RM2.97

MANAGEMENT revealed that offshore Sarawak is where the upstream action is for Dialog Group Bhd, whose joint venture (JV) has found drilling success at multiple wells at the Balai marginal field cluster.

A downstream venture in Singapore, however, is running less smoothly, resulting in a cost overrun.

We cut our financial year 2013 earnings per share (EPS) to impute a cost overrun of RM10mil but maintained the rest of our forecasts.

Our standard operating procedure (SOP)-based target price is intact as we continue to value Dialog's businesses at 18.9x price-earnings (P/E), a 40% premium over our calendar year 2013 target market P/E of 13.5x.

Attractive prospects for marginal and mature fields are the potential catalysts that support our “outperform” call and 40% premium to the market.

Management told us that progress at the pre-development of the Balai cluster comprising four marginal fields namely Balai, Spaoh, Bentara and West Acis, has been encouraging. The Balai risk service contract (RSC) is operated by BC Petroleum Sdn Bhd, a JV owned by Australia's Roc Oil Company Ltd (Roc) (48%), Dialog (32%) and Petronas Carigali (20%). The Balai cluster is Dialog's first upstream venture.

Separately, we learnt that a plant maintenance project in Singapore has been hit by a cost overrun, resulting in a RM10mil provision booked in second quarter of financial year 2013. Works are continuing despite the provision and ongoing negotiations between Dialog and the client.

We are encouraged that the pre-development works at the Balai cluster are in full swing. The pre-development is slated for completion by end-Jun 2013 at the earliest, after which BC Petroleum will make a decision on moving forward with full-field development.

The JV will then submit a field development plan to Petronas, which owns the Balai cluster.

We expect Dialog to scale new net profit highs in financial year 2013-15, giving a three-year EPS compounded annual growth rate of 14.9%. Malaysian Bulk Carriers Bhd

By HwangDBS Vickers Research

Rating: Trading Buy

Fair value: RM2

MALAYSIAN Bulk Carriers Bhd (Maybulk) has a share price of RM1.56, market capitalisation of RM1,560mil and is 48% owned by Robert Kuok and family.

It is the largest dry-bulk ship owner in Malaysia involved in international shipping. It currently owns and operates a fleet of 16 bulk carriers and three product tankers. It also charters-in third party vessels to service committed contracts of affreightment.

The dry-bulk market is heading towards an inflexion point, a turnaround possibly in second half of 2013.

Charter rates are expected to head north with declining new deliveries in the market from 2013 onwards coupled with an expected gradual increase in demand to ship dry-bulk commodities.

Like other bulk carriers, Maybulk had been suffering from the shipping capacity (tonnage) supply-demand imbalance in the past few years as new-build deliveries flooded the market.

However, the Baltic Dry Index, the global benchmark for freight rates for dry bulk carriers, has plunged to a multi-year low of around 800, compared to its 10-year average of 3,300.

Hence, we see limited downside from current levels as the depressed rates are unlikely to be sustainable.

Maybulk first bought a 21.2% stake in PACC Offshore Services Holdings Pte Ltd (POSH) in December 2008 for US$221mil (RM663mil).

It came with the option to sell the shares at 125% of its subscription price by end-2013 if there is no initial public offering (IPO) for POSH, translating into RM840mil cash returns to Maybulk.

However, POSH is ripe for an IPO given the 107% earnings growth in financial year 2012, in tandem with the booming offshore service vehicle (OSV) market.

Our back-of-envelope calculation indicates that Maybulk's stake in POSH could be worth RM870mil (56% of market capitalisation) based on 12x price-earnings (PE) multiple and 30% earnings growth in FY13, which might be conservative.

The share purchases by the directors lend credence to our view that Maybulk is primed for a major re-rating with visible catalysts in the pipeline.

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