Maintain buy at RM5.99 with target price of RM6.54: We maintain our “hold” call for TNB as we believe the company could face challenges in the coming months in the form of sustained high coal prices. We also take into account Petronas’ gas curtailment which means that TNB has to substitute gas with a higher usage of coal and distillate, and the lack of visibility with regards to timing of any tariff adjustments.
Our target price of RM6.54 for TNB is based on unchanged price-earnings ratio of 15 times FY11 earnings. This is the post-June 2006 average multiple of the company.
According to Bernama, TNB has earmarked four sites to set up geothermal power plants which will utilise steam generated from hot springs. The project is currently in the initial stages of Phase 2, in which geophysics and subsurface analysis are being carried out.
The next stage will include exploratory drilling, which is similar to oil drilling. Each geothermal plant will have the potential to generate more than two megawatts (MW) of electricity. A large hot spring can generate up to 20MW of power. The geothermal project is expected to be fully implemented by 2016.
This move into geothermal energy is part of TNB’s long-term strategy to diversify into renewable energy sources, given the rising coal and gas prices.
The need to look at other viable renewable energy options is gaining importance, considering adverse public opinion on the use of nuclear power after the nuclear disaster in Japan.
The foray into geothermal power is in line with the government’s plan to increase renewable energy contribution to Malaysia’s power generation mix from less than 1% (41.5MW) currently to 5.5% (985MW) by 2015.
With the expected announcement on the operation and maintenance of an 84MW hydropower plant in Pakistan, we believe TNB is on track to achieve its key performance indicator of RM1.8 billion to RM1.9 billion worth of revenue from non-regulated businesses. We are also pleased to hear that political unrest in the Middle East is not holding TNB back from expanding its business into the region. — ECM Libra, May 6 |
