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Tenaga Nasional Has Surged 41% In One Year, What’s Next?
By: Shane Goh
Articles (99) Profile

Tenaga Nasional is the largest electricity utility in Malaysia. The firm’s core businesses are in the generation, transmission and distribution of electricity.

As at end 31 December 2013, Tenaga Nasional operates and maintains six thermal power stations and three major hydroelectric power generating schemes in Peninsular Malaysia. These plants make up 36.6 percent of the generation market share in the peninsula.

Its roots are traced back to 1949 with the forming of the Central Electricity Board of the Federation of Malaya. Over the years, Tenaga Nasional has diversified into the manufacture of transformers, high voltage switchgears and cables as well as providing professional consultancy, architectural, civil and electrical engineering services.

As of 31 December 2013, Tenaga Nasional boasts an estimated customer base of 8.4 million customers in Peninsular Malaysia, Sabah and Labuan.

How Does The Industry Work
Tenaga Nasional’s business is simple to understand. It produces electricity, which is sent to substations via transmission lines, before distributing them to the end users.

There are three methods to generate electricity: Thermal, Hydro and Co-generation. According to Malaysian Energy Info Hub (MEIH), the former shoulders the bulk of the country’s total output in 2012 with about 89 percent while hydro contributes 7 percent and co-generation chips in the remaining 4 percent.

The consumption side can be broken down to five economic sectors: Industrial, Commercial, Residential, Agriculture and Transport. The latter two have minimal electricity consumption compared to the former three. Citing MEIH, industrial usage made up 45 percent of total consumption in 2012 while commercial (33 percent) and residential (21 percent) followed close by.

Despite holding the lead, as a percentage of total consumption, the industrial sector has fallen from 53 percent in 2000 while the commercial and residential sectors have grown from 28 percent and 19 percent respectively over the same time period.

Growing Demand
According to MEIH, Malaysia’s electricity generated has close to double in over the past 12 years to come in at 11,562 kiloton of oil equivalent (ktoe) in 2012. Over the same duration, electricity consumption has made a near two-fold jump to 10,011 ktoe as well.

The surge has been driven by three factors: an expanding population, an increasing urbanisation rate and a rising income per capita. According to the World Bank, Malaysia was home to 23.4 million citizens in 2000. By 2013, the figure ballooned 26.9 percent to 29.7 million.

Based on urban ratios from the United Nations World Urbanisation Prospects, this implies that Malaysia’s urbanisation rate rose from 62 percent to 74 percent over the same period. During this time, the country’s income per capita improved from US$4,005 to US$10,514 in 2013, according to data from the World Bank.

Positive Cash Flow Since 1999
These favourable country factors have bolstered Tenaga Nasional’s coffers. The company has posted positive cash flow from operating activities since 1999. In the past five years, its top line has grown at a compound annual growth rate (CAGR) of 9 percent to reach RM42.8 billion.

Fuel gas and coal made up 45.5 percent and 40.5 percent of Tenaga Nasional’s generation fuel mix in FY13. This implies that the company is susceptible to fluctuations of their respective commodities prices.

In 2010, thermal coal central Appalachian prices surged more than 50 percent and stayed at elevated levels for the first half of 2011 before returning to pre-2010 levels in 2H11. This resulted in a narrowing of operating margins for Tenaga Nasional. In FY10 and FY11, its operating margins came in at 13.8 percent and 5.6 percent respectively.

However, with the stabilising of coal prices from 2012 onwards, the firm’s operating margins ranged between 15.9 percent and 18.6 percent from FY12 to FY14. This led to a sharper rise in bottom line which experienced a 19.2 percent CAGR over the past five years to hit RM6.5 billion. The positive bottom line has fuelled the growth of the company’s retained profits, which expanded from RM19.8 billion in FY10 to RM37.2 billion in FY14.

This has helped to reduce Tenaga Nasional’s debt-to-equity ratio from 70.5 percent five years ago to 58.9 percent in its latest fiscal year. This is in spite of a 19.7 percent increase in total borrowings in the past five years to support its RM34.8 billion net capital expenditure during that period.

Largely Positive Prospects
Moving forward, all eyes will be on June 2015. The Energy, Green Technology and Water Minister Datuk Seri Dr Maximus Ongkili has said that the existing electricity tariffs will be maintained until then.

Although the last hike in electricity prices took place on 1 January, the increase was largely offset by a surge in domestic natural gas price and imported liquefied natural gas price, noted AMMB Holdings, which has a ‘Buy’ rating on the counter.

On the street, out of 15 research houses that issued a target price on the stock, 11 have the equivalent of a ‘Buy’ rating, three analysts have a ‘Hold’ call while one ‘Sell’ rating stands alone.

Based on their latest target prices, the mean is RM15.17, implying a 16.7 percent upside over Tenaga Nasional’s closing price of RM13.00 on 7 November.

Tenaga Nasional Price Chart, Source: FactSet
This article is brought to you by Bursa Malaysia Berhad. The research in this article was conducted independently by Pioneers & Leaders (Publishers) Pte Ltd (“Pioneers & Leaders”) and the views and opinions expressed in this article are Pioneers & Leaders’ own and do not represent the views and opinions of Bursa Malaysia. Bursa Malaysia does not warrant or represent, expressly or impliedly as to the accuracy, completeness and currency of the information in this article. In no event shall Bursa Malaysia be liable to the reader or any other third party for any claim howsoever arising out of or in relation to this article.
Currently pursuing his Chartered Financial Analyst qualification, Shane provides coverage on the property, consumer and environmental sectors at Shares Investment.

Please click here for more information about this author.

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