Rethinking Tenaga a.k.a. Don't Play Jenga With Your Cat

I expected Tenaga to be the biggest casualty following the ekection results, and it did not fail me. It has lost some RM2.00 in its share price, or roughly translated 4.33bn shares x 2.00 = RM8.66bn in market cap.

Let's be sensible here, yes the tariff hike may be delayed and Tenaga will suffer losses the longer the delay, but to wipe RM8.66bn from the market cap may be overdoing it. On estimation if they don't raise the tariff one year, the additional coal price will hit them with approximately RM1.4bn losses. How long do you think the tariff increase will be delayed??? Even if the opposition gets enough seats to form a new government, they will also have to allow Tenaga to raise tariff pretty soon.

Ok, one is the delay, secondly the tariff increase might be reduced as well. Now that is a real possibility, and that should ipact earnings on a much longer horizon.

The problem: units generated from coal-fired power plants constitutes 26% of Tenaga National industry generation. Also, under the PPA, TNB has to subsidize IPP excess coal cost if prices breach the USD29/mT level. Current coal price is approximately USD79/mT. Another issue is Tenaga may have to change some of its older coal-fired power plant to accommodate lower grade coal as they are cheaper. The price differential in high and low grade coal prices is some USD22/mT. At the moment, Tenaga's high and low grade coal mixture is 45% and 55%, respectively. Therefore, potential higher CAPEX requirements.

There is a base tariff revision due in June 2009, and the last tariff revision was in June 2006. So that is some comfort at least. Another thing to bear in mind is that Tenaga is covered for FY2008 in terms of coal supply but beyond that they are still open to market forces.

At RM6.70 the dividend yield for 2008F is close to 6%. Hence I do see current levels as a realistic bottom. However, the push back up from here will be long and arduous. Hence though I see value now, the returns may take a long time to come by. If you are a pure dividend yield player, then Tenaga looks good for now as it is still the state utility, and no one should sneeze at 6% dividend yield - can do a lot worse. Still, even if the market were to rebound to 1400 come June 2008, I don't think Tenaga will get back to anywhere near RM8.50 should that happen. Better pickings elsewhere because the problems affecting Tenaga cannot and does not seem possible to be resolved in just a few months.