TNB’s recurring dilemma

KUALA LUMPUR: The rising fuel cost is back to haunt Tenaga Nasional Bhd (TNB) again, highlighting the growing need for the utility group to raise electricity tariff in order to pass on the costs to end users as coal and gas get more expensive, said analysts.

However, investment analysts generally do not foresee a tariff hike to happen soon, at least not in TNB’s current financial year ending Aug 31, although they have been told the group is in discussions with the government on a revision on electricity rate.

“There appears to be no near-term relief from the higher fuel costs as the government is unlikely to raise tariffs in an election year,” said CIMB Research in its review on TNB’s 2Q earnings.

CIMB has a “neutral” call on the big-cap counter and instead recommends independent power producer, YTL Power International Bhd. “We prefer YTL Power for exposure to the power sector,” it said in a research note.

RHB Research and Maybank IB Research have “underperform” and “sell” calls on TNB shares respectively.

“TNB lacks catalysts due to slowing electricity demand growth of 4%-5% for FY11 (FY10: 8.8%) and no clear timeline for a formal fuel cost pass-through formula to help address the issue of fluctuating fuel prices,” said RHB Research when reviewing TNB’s earnings figures.

Meanwhile, Maybank IB commented that its cautious outlook was due to the input cost pressure, outcome of the natural gas maintenance shutdown and extremely tight reserve margins.

“Should there be more gas outage problems, TNB has no choice but to burn oil and distillates; this is a loss-making proposition,” it noted.

TNB’s net profit fell 37% to RM630.3 million in 2QFY11 from RM1 billion a year ago, despite higher revenue of RM7.5 billion versus RM7.4 billion in the previous corresponding period. Earnings per share dropped to 14.2 sen from 23.05 sen previously.

The reduced profit was due mainly to the sharp rise in fuel costs following the spiralling coal prices. The group paid an average price of US$80 (RM241) per tonne during 1QFY11, but the price went up to US$103.80 in 2Q.

Compounding the problem is the shortage of gas due to maintenance works at Petronas platforms. Consequently, TNB has had to burn more coal, which is not subsidised by the government, to generate power.

The eighth largest stock on Bursa Malaysia in terms of market capitalisation, TNB’s share price has been on a downhill trend since last September, a big contrast to its upward trajectory on the FBM KLCI.

The counter tumbled to RM6-level in recent weeks — the lowest level since June 2009 — from the high of RM7.36 in last September. It closed at RM6.03 last Friday.

The previous tariff hike was in June 2008. Some quarters said the government-linked company (GLC) was unlikely to get out of the tough scenario so long as there wasn’t a cost pass-on formula for the utility group.

In fact, some analysts had earlier recommended the utility stock on the grounds that an electricity tariff hike would be granted when the federal government started talking about trimming subsidies gradually, including the hefty gas subsidy borne by Petroliam Nasional Bhd (Petronas) since last year.

The Performance Management and Delivery Unit (Pemandu) had proposed a subsidy rationalisation in the power sector. Under the subsidy reduction scheme, the first cut in gas subsidy and the corresponding increase in electricity tariff should have been implemented last July.

Subsequently, there was to be a gradual trim on the gas subsidy every six months.

As of now, the plan has yet to kick off although the gas subsidy is ballooning at a faster rate since the existing gas reserve is depleting and Petronas has to fork out hard cash to import gas from Thailand and Vietnam.

The national oil firm is bearing an annual gas subsidy of RM19 billion.

Industry observers said it might be even harder to see the revision on gas subsidy soon given the jump in coal prices although the need was rising as any increase in cost of utilities would be an unpopular move among the people.