PETALING JAYA: Downward trending fuel prices would likely lead to lower generation costs for Tenaga Nasional Bhd (TNB) in the final quarter of financial year 2019 (FY19).
Kenanga Research said in a report that with fuel prices trending downward especially coal which fell 11% year-on-year (y-o-y) in 9M19, the utility giant is likely to register lower generation costs in the coming 4Q19 which could post resilient numbers although the second half has traditionally been a weaker period.
However, the research added that the lower fuel costs would result in a lower effective tariff rate in the 1H20 under the imbalance cost pass-through or ICPT mechanism.Kenaga Research maintained market perform on the stock as it raised its forecasts for FY19 and FY20, resulting in a higher target price of RM14.30.
Shares of TNB closed 16 sen up to RM13.72 with a total of 4 million shares traded yesterday.
In its recently concluded quarter, TNB’s earnings beat expectations as coal prices declined while electricity demand grew.
Core profit for the quarter jumped 43% y-o-y to RM1.37bil, bringing 9M19 core profit to RM4.01bil or 12% higher over the previous corresponding period.
According to the research house, the 6% lower generation operating expenditure (opex) in 3Q aided the earnings growth although a 9% higher generation opex capped year-to-date earnings from growing higher.
“This was due to higher requirement mix for the expensive LNG as gas volume rose 7% for 9M19 to 1,030mmscfd with average LNG price jumping 13% to RM35.03/mmbtu, ” it said in a report yesterday. However, Kenanga noted that coal prices were generally on the downtrend with average costs falling 29% y-o-y in 3Q and 11% y-o-y in 9M19.
As for non-generation cost, the group’s ability to control cost came as a positive surprise to some analysts considering that the market was not expecting a significant decline on this front.
Overall non-generation cost was down by 6.9% y-o-y for the 9M19, driven mainly by lower opex which is down by 39% y-o-y. Staff cost is the biggest cost component under the non-generation cost, which is also down by 5.5% y-o-y.
Affin Hwang Capital Bhd believes that if TNB can maintain its current cost structure, it should be able to hold on to its current profitability.
Among its international joint venture and associates, the performance of TNB’s Indian assets, GMR, continued to disappoint, said analysts, due to the challenging operation environment and unclear regulatory framework.
In the event TNB decides to dispose of this asset – which it is considering among other options – the group could potentially record a gain as it has written down a significant portion of GMR on its book, said Affin Hwang Capital.
The group, which has impaired up to 60% of its investments in GMR, has not decided on whether it will remain in GMR or exit in the future.
The research house noted that Turkey, which was the other problematic asset, delivered better results, due to higher plant availability, higher hydrology and better wind. Going by this, it believes that the risk of further write-downs is unlikely for now.
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