Published October 28, 2009

Tenaga core earnings slide 18%

Results better than expected; govt to consider application for tariff hike in Jan

By S JAYASANKARAN
IN KUALA LUMPUR

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SHARES of national power utility Tenaga Nasional moved up slightly to RM8.50 after the power utility announced on Monday a 2009 core net profit - net profit stripped of extraordinary items - of RM2.1 billion (S$862 million), 3 per cent above consensus estimates.

Loosening grip: Tenaga's foreign shareholding has slid from a high of 29% in April 2007 to only 9.7% currently

Even so, the utility's core net profit slid 18 per cent year-on-year mainly due to decreased demand because of the recession and higher coal prices. Still, the company remains reasonably sound with free cash-flows of RM1.6 billion and gross cash balances of RM6 billion although it has always been in a net debt position: its total long term liabilities are a whopping RM31 billion.

What the company wants is a tariff hike which the government will consider in January. The utility, which is 70 per cent-owned by the government, can only raise, or drop, tariffs with government consent and it's been lobbying Kuala Lumpur for a raise after it cut tariffs by 3.7 per cent in March. But fuel prices have gone up and the government has yet to agree.

It could be one reason why foreign shareholders seem to have given up on the company. The firm's foreign shareholding has slid from a high of almost 29 per cent in April 2007 to only 9.7 per cent currently.

In many ways, Tenaga's dilemma mirrors the government's predicament: it wants to reduce the burden of rising subsidies in the power sector but fears a public backlash against rising costs at a time when the opposition is looking increasingly resurgent,

Currently, industrial and household users enjoy some of the cheapest rates in Asia courtesy of subsidised gas supplied to power producers by Petronas, Malaysia's national oil corporation.

Indeed, the oil firm loses billions annually through the subsidies which is why Kuala Lumpur has agreed, in principle, to commit to a gradual move towards market prices. In that sense, a tariff hike could be an important first step in that direction although analysts still think it unlikely given that the power firm isn't doing too badly.

Still, Kuala Lumpur seems to be preparing the ground for an eventual adjustment. Energy Minister Peter Chin has publicly said that consumers 'would have to be prepared' for higher tariffs going forward.

Petronas has also been lobbying for a move to market prices. At its peak, gas prices were at RM48 per million British Thermal Units (mmbtu). At that time, Tenaga was paying Petronas RM14.31/mmbtu, a subsidy of over 300 per cent. Currently, the utility's subsidy has eased to a still-sizeable 50 per cent.

A tariff hike would benefit the firm: it flows directly on to its bottom line. Even so, some analysts think the power firm is overrated from a valuation standpoint. Analysts at Arab-Malaysian Bank estimate Tenaga's 'fair' value at around RM8.30.