Share price and foreign shareholdings of TNB go down as its fuel cost goes up

HIGH coal prices have been working against Tenaga Nasional Bhd, and this has clearly been seen in its decreasing share price.

Uncertainties in TNB's tariff mechanism has also seen foreign shareholding gradually decrease from a two-year peak of 12.7% in September 2010 to 10.4% in January 2011.

With coal making up some 50% of TNB's fuel cost, even a small increase in the market price of coal greatly affects its bottomline.

As it is, the supply of coal has already been tight. This problem was exacerbated with the flooding in Queensland, Australia.

Australia is the world's largest supplier of coal, and thus, the floods caused coal prices to spike as fears of tight supply escalated.

To make matters worst, the earthquake and tsunami tragedy hit Japan, and caused panic when its nuclear power plant threatened to emit radiation.

There are now expectations for the Japanese to reduce its nuclear dependency and renew its purchases of coal for its thermal plants. This has caused coal to resume its upward trend.

Coal prices have risen by 8% from last month to US$130 per tonne currently - 53% above the US$85 per tonne incorporated into TNB's current tariff structure.

Currently, most of TNB's coal supply is purchased under term contracts with prices being negotiated annually based on current rates.

“A US$10 increase in coal prices will set TNB's net profit back by RM350mil to RM400mil. That's very significant,” said a power analyst.

AmResearch analyst Alex Goh maintains his financial year (FY) 2011 and FY12 coal cost assumption of US$100 per tonne, pending the developments in TNB's tariff review, scheduled bi-annually in July-August this year.

Based on current coal prices and the current US dollar to ringgit exchange rate, the AmResearch analyst is estimating that TNB's FY11 to FY13 net profits could drop by 25% to 26%.

“We estimate that coal handling costs constitute about 0.6% of TNB's operating expenses given that coal makes up 50% of TNB's fuel cost; fuel costs, in turn, account for around 21% of operating expenses and coal handling costs are around 5% of coal cost,” said an analyst from CIMB Research.

Meanwhile, TNB's three-year coal transportation contract with Maybulk will expire in mid-2011 and the rate is likely to be revised down significantly from the current high rate of US$60,000 to US$90,000 per day.

Thus, TNB will benefit from lower handling and freight rates for its coal.

“However, we believe that this will be more than offset by the increase in coal price arising from extra demand from Japan for fossil fuels to compensate for the loss of nuclear power generation capacity. The national utility company has only managed to lock in 18% of the 18.1 million tonnes of coal that it expects to procure in FY11,” said the CIMB analyst.

ECM Libra research head Bernard Ching notes that power demand has been rising steadily from a low base in 2009. Power demand has increased 8.9% from 83,353 GWh in 2009 to 90,771 GWh in 2010.

“Going forward, power demand growth will be driven by a potential rebound in Malaysia's Industrial Production Index (IPI), which in turn is driven by a steady recovery in the developed economies as well as successful implementation of projects under the government's Economic Transformation Programme,” he said.

Ching added that since the industrial sector accounted for the biggest source (44.3% or 40,186GWh) of electricity demand in 2010, any rebound in industrial production would in turn boost industrial electricity production, which would in turn positively impact overall power demand.

Although the recent rise in coal prices will dampen the near term prospects of TNB, this will support its argument for a tariff hike which is likely to be implemented after the general election, according to Ching.

“Near term share price weakness presents an opportunity for accumulation as valuation is undemanding with financial year ending Aug 2011 price earnings at 12 times.

The expectations of a tariff hike is premised on the Government's move to reduce subsidies to keep its budget deficit in check.

With the general election speculated to happen this year, it would appear that hopes for a tariff hike is diminishing.

A tariff hike may help the Government reduce subsidy expenses but it can also lead to inflationary concerns.

TNB is now paying a subsidised gas price of RM10.70 per million British thermal units (mmbtu), which is lower than the market price of about RM12 per mmbtu.

Last week, TNB acquired 22.1% of port operator Integrax for RM106.5mil.

TNB has been looking into ways to reduce fuel costs amid the coal price surge.

This was done via a share sale agreement with two substantial shareholders of Integrax.Halim Rasip Holdings Sdn Bhd and Rozia Hanis collectively agreed to sell 66.5 million Integrax shares to TNB.