PP 7767/09/2010(025354)

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

R e su l ts / B ri e f i ng N o t e
15 July 2010
MARKET DATELINE

Tenaga Nasional Share Price

Fair Value
:
:
RM8.61
RM10.20
3QFY10 Results Dampened By Higher Coal Cost And Recom : Outperform
(Maintained)
Provisions

Table 1 : Investment Statistics (TENAGA; Code: 5347) Bloomberg: TNB MK

Net Adj net Core EPS Net
FYE Turnover Profit Profit# EPS# Growth PER C.EPS* P/NTA Gearing ROE GDY
Aug (RMm) (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%)
2009 28,785.6 917.9 2,157.1 49.8 -7.4 17.3 - 1.43 0.7 3.6 2.1
2010f 30,615.0 2,947.0 2,947.0 68.0 36.6 12.7 66.6 1.3 0.7 10.9 3.2
2011f 31,921.2 3,412.1 3,412.1 78.7 15.8 10.9 76.2 1.2 0.6 11.7 3.7
2012f 33,286.2 3,936.3 3,936.3 90.8 15.4 9.5 84.7 1.1 0.5 12.4 4.2
Main Market Listing / Trustee Stock / Syariah-Approved Stock By The SC # Excl EI and forex * Consensus Based On IBES Estimates

RHBRI Vs. Consensus

♦ 3Q core profit down 39.5% qoq ... Excluding forex gains of RM573m, Above
TNB’s 3Q results were broadly in line with our and consensus estimates In Line
with 9MFY10 core net profit of RM2.1bn (+21.8% yoy) accounting for 70- Below
73% of our and consensus FY10 net profit forecasts. We expect 4Q results
to benefit from stronger demand (typically stronger in 4Q) as well as the Issued Capital (m shares) 4,347.9
absence of provision for vacated accounts of RM63m booked in 3Q, partly Market Cap (RMm) 37,435.8
offset by higher coal cost. As expected, TNB did not declare any dividend. Daily Trading Vol (m shs) 4.6
52wk Price Range (RM) 7.73 - 8.84
♦ … with stronger demand more than offset by higher coal cost and Major Shareholders: (%)
provision for vacated accounts. QoQ, electricity unit sales for Peninsular Khazanah Nasional 35.7
Malaysia rose 5.1% led by the domestic (+13.6% qoq) and commercial EPF 17.0
(+5.3% qoq) segments while the demand from the industrial segment was
flattish qoq due to the shorter working period for Feb (reflected in Mar’s
billings). Core pre-tax profit, however, slipped by 37.6% qoq resulting FYE Aug FY10 FY11 FY12
from a combination of the abovementioned provision for vacated accounts EPS chg (%) (3.8) (2.7) (1.6)

and higher generation cost due to: 1) higher generation from coal-fired Var to Cons (%) 2.1 3.3 7.2

plants (3QFY10: 43.6% of total generation vs. 2QFY10: 36.9%). According

PE Band Chart
to management, gas supply was capped between 900 and 1,100mmscfd in
3Q due to scheduled maintenance works. Gas supply in 4Q is likely to
average at similar levels; and 2) higher average coal cost (3QFY10: PER = 16x
US$91.6/tonne vs. 2QFY10: US$82.2/tonne). PER = 13x
PER = 10x

♦ Briefing highlights. YTD (Sep ’09-Jun ’10) unit sales growth stood at
+9.9% yoy and with Jun electricity demand still up double digit (+11%
yoy), management raised their FY10 demand growth guidance to 10%
from 7-8%. As for coal, pricing for the bulk of FY10’s requirement has
been locked-in and is expected to average at an unchanged US$90/tonne. Relative Performance To FBM KLCI
Finally, implementation of Pemandu’s gas subsidy revision proposal is a
matter of timing according to management. However, in addition to the
FBM KLCI
revision in electricity tariffs for the higher gas price, management believes
this could be accompanied by a base tariff review and fuel cost pass-
Tenaga Nasional
through formula. Both these, if materialised, would be a major rerating
catalyst for TNB, in our view.

♦ Risks. Risks include: 1) slower-than-expected demand growth; 2)

depreciating RM; and 3) rise in coal prices.

♦ Forecasts. We toned down our FY10-12 net profit forecasts by 1.6-3.8%

largely after adjusting for: 1) demand growth assumptions; 2) generation
mix; and 3) provision for doubtful debts (FY10).

♦ Investment case. Following the earnings revision above, our indicative David Chong, CFA
(603) 9280 2186
fair value has been lowered to RM10.20 from RM10.50, based on target
david.chong@rhb.com.my
FY11 PER of 13x. Outperform call on the stock, however, is unchanged.

Please read important disclosures at the end of this report. Page 1 of 6

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Table 2. Tenaga Nasional Quarterly Results

QoQ YoY YoY
FYE Aug 3Q09 2Q10 3Q10 (%) (%) 9MFY09 9MFY10 (%) Comments

Turnover 7,002 7,389 7,723 5 10 21,323 22,451 5 3Q higher yoy and qoq driven by higher unit
sales. 3QFY10 overall unit sales rose 13.6%
yoy (vs. 2QFY10: +12.8% yoy and 3QFY09:
-5% yoy) where unit unit sales growth for
Peninsular Malaysia stood at
+13.7%/+13.8%/-4.7% yoy for
3QFY10/2QFY10/3QFY09 respectively.

EBITDA 1,694 2,276 1,692 (26) (0) 5,308 6,046 14 QoQ down due to provision for vacated
accounts and generation mix, where coal-
fired power plants accounted for 43.6%
(2Q: 36.9%) of total units generated, and
higher average coal cost of US$91.6/tonne
(2Q: US$82.3/tonne). 9MFY10 higher yoy
mainly due to lower average coal cost of
US$84.8/tonne (9MFY09: US$94.3/tonne)
and appreciation of RM.
Margin (%) 24.2 30.8 21.9 24.9 26.9
Depreciation (891) (1,053) (893) (15) 0 (2,609) (2,866) 10
Net int.& other inc (134) (125) (104) (17) (22) (446) (366) (18) Wtd avg cost of debt stable at 5.3% for
9MFY10. Net debt at end-3QFY10 fell further
to RM13.6bn vs. RM15.3bn as at end-
2QFY10 (RM17.4bn at end-3QFY09) as
TNB’s cash continues to pile up, repayment
of debt and exchange rate effects.
Associates 9 13 19 48 >100 27 27 (0)
Forex 561 152 573 >100 2 (997) 681 >100 Forex translation gain in 3QFY10 due to
both appreciation of ringgit vs. Yen
(RM3.57/100 Yen vs. RM3.81/100 Yen at
the end-2QFY10) and ringgit vs. US$
(RM3.26/US$ vs. RM3.40/US$ at end-
2QFY10).
Exceptionals 0 0 0 nm nm 0 0 nm
Pre-tax profit 1,240 1,262 1,287 2 4 1,283 3,522 >100
Taxation (235) (261) (178) (32) (24) (563) (714) 27
Eff. tax rate (%) 18.9 20.7 13.8 43.9 20.3
Minority interest 17 (1) (2) 57 >100 34 5 (85)
Net profit 1,023 1,000 1,107 11 8 754 2,814 >100
Core net profit 462 848 534 (37) 16 1,750 2,132 22 Core net profits exclude forex.
Source: Company data, RHBRI

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Table 3. 3Q Results Highlights And Outlook

Positive factors Negative factors Outlook

Electricity 3Q overall demand rose 13.6% yoy Jun unit sales for Peninsular
demand (2QFY10: +12.8% yoy; 3QFY09: - Malaysia grew 11% yoy, led by the
5% yoy) mainly due to stronger industrial (+14.7% yoy) and
unit sales for Peninsular Malaysia. domestic (+10.2% yoy) segments
while unit sales for the commercial
3Q electricity unit sales for segment rose 6.9% yoy. YTD (Sept
Peninsular Malaysia jumped 13.7% ’09-Jun ’10), electricity demand
yoy, led by stronger industrial was up 9.9% yoy. Consequently,
(16.6% yoy) and domestic (13.8% management upped FY10
yoy) demand. Demand from the demand growth guidance to
commercial segment was up as well 10% from 7-8%.
but at a slower 10% yoy.
We have raised our FY10 demand
growth assumption to 10% from
7% but in lieu of the higher base,
we lowered our FY11 and FY12
demand growth assumptions to
4.5% p.a. from 5% p.a..

Fuel cost 3QFY10 coal cost averaged around 4Q coal cost is expected to average
US$91.6/tonne (2QFY10: around US$95/tonne and with the
US$82.2/tonne; 3QFY09: bulk of pricing already locked-in,
US$79.9/tonne. management continued to guide for
an average cost of US$90/tonne for
FY10. Our FY10-12 average coal
price assumptions remain at
US$90/tonne.

IPP Additional outpayments of RM69m The estimated full impact of

outpayments for Jimah and RM116m for Tanjong additional IPP payments for Jimah
Bin incurred in 3Q due to higher is around RM1bn p.a. in FY11, vs.
dispatch. RM800m in FY10.

Exceptionals

Forex RM/100 Yen appreciated to 3.57 RM/US$ rate appreciated further to

from around 3.81 (as at end-Feb RM3.20US$ post quarter-ended
’10) while the RM/US$ exchange May ’10 but the RM/Yen rate was
rate appreciated to RM3.26 from generally stable.
3.40 as at end-2QFY10.
Consequently, TNB booked in forex
gains of RM573m during the
quarter vs. 2QFY10: RM152m gain.

Balance Sheet And Cashflow

Net debt Net debt as at end-May ‘10 Total debt balance as at end-May
improved to RM13.6bn, vs. end-Feb fell to RM21.6bn (2QFY10:
‘10 of RM15.3bn. RM22.4bn, 3QFY09: RM22.5bn)
due to exchange rate impact and
repayment of debt. More
importantly, cash increased further
to RM8bn (end-Feb ’10: RM7.1bn;
end-3QFY09: RM5.1bn).

Capex 9MFY10 capex amounted to Management expects FY10 capex of

RM2.7bn (9MFY09: RM3bn), of around RM4bn while capex for FY11
which, RM1.4bn was spent on is expected to remain at a similar
distribution, RM681m on level. We have retained our FY10-
transmission and the balance on 12 capex assumptions of RM4.5bn
generation and others. p.a..
Source: RHBRI

♦ Briefing highlights.

o Jun unit sales still resilient. Jun unit sales growth for Peninsular Malaysia remained resilient at +11% yoy
(May: +11.1% yoy) as all three segments, i.e. industrial (14.7% yoy vs. May: 15.5% yoy), commercial (6.9%
yoy vs. May ’10: 8.8% yoy) and domestic (10.2% yoy vs. May ’10: 6.4% yoy), recorded stronger yoy numbers.
However, we note that peak demand has since eased to around 14,000-14,500MW after hitting a new high of
15,073MW in May, which management attributed to weaker demand from the electronics sector. While the
downtrend could imply weakening demand ahead, on the flipside, peak demand appears to have stabilised in
recent weeks. YTD (Sep ’09 - Jun ’10), unit sales growth for Peninsular Malaysia stood at 9.9% yoy with all
three segments reporting stronger demand (industrial: +12% yoy; commercial: +7.8% yoy; domestic: +9.5%

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 15 July 2010

yoy). With just two months remaining to the financial year, management upped FY10 demand growth guidance
to 10% (from 7-8%). Looking ahead to FY11, management’s demand growth expectations, for now, stands at
3.3-4%. Consequently, we have raised our FY10 demand growth assumption to 10% (+7% previously).
However, given the higher base effect, we have lowered our FY11-12 demand growth assumption slightly to
4.5% p.a. from 5% p.a..

o FY10 coal cost expected to average around US$90/tonne. Total coal consumed in 9MFY10 was 13.3m
tonnes (9MFY09: 7.9m tones), at an average price of US$84.8/tonne (9MFY09: US$94.3/tonne). For the full-
year, TNB estimates that it would need around 18.8m tonnes of coal and guided for a full-year average cost of
US$90/tonne (unchanged). This would imply that 4Q coal cost could average around US$95/tonne (4QFY09:
US$81.4/tonne), partly mitigated by the strengthening of the RM against the US$.

o Still no news on tariff review. Management was unable to shed more light as to when Pemandu’s gas
subsidy revision proposal would be implemented but thinks it is a matter of timing. However, in addition to the
revision in electricity tariffs for the higher gas price, management believes this could be accompanied by a base
tariff review and fuel cost pass-through formula. The paperwork had already been done earlier but this would
depend on the Government’s willpower. Both these, if materialised, would be a major rerating catalyst for TNB,
in our view. We estimate that a 1% hike in tariffs would raise our FY11-12 earnings projections by around 6-
7%.

o Bidding for 2,000MW capacity expansion expected to take place soon. According to management, the
Government plans to invite the three existing coal-fired power plant operators, i.e. TNB, Jimah and Tanjong
Bin, to bid for the 2,000MW capacity expansion. Potentially, this expansion could be split into two 1,000MW
blocks awarded to two separate operators rather than the entire 2,000MW expansion awarded to a single
operator. While the open bidding process is to encourage competition, the decision to split up the 2,000MW
expansion appears a little puzzling. However, management believes a possible explanation for this is that if the
expansion is done such that each 1,000MW is commissioned in stages, this could help avoid the potential
situation of excess capacity coming onstream especially if demand turns out to be weaker-than-expected.
Moreover, the Government is currently initiating discussions with the 1st generation IPPs on the possible
extension of their services subject to supply of natural gas from Petronas and pricing for the IPPs’ electricity.
Commissioning the 1,000MW in stages would also help stagger the burden of additional capacity payments.

o Cash pile likely to be retained for capex and debt repayment. Despite the continuous rise in TNB’s cash
pile, the cash is likely to be retained to fund future capex and potential capacity expansion, as well as for the
repayment of debt. About RM3.5bn worth of debt is due in FY11 (around RM1.5bn denominated in US$ and the
rest in RM). Management had previously said that the US$-denominated debt is likely to be repaid to reduce
the group’s exposure to foreign currency denominated borrowings but the remaining debt due could be
refinanced.

Forecasts And Recommendation

♦ Forecasts. We have toned down our FY10 net profit forecast by 3.8%, which takes into account: 1) an upward
revision in our demand growth assumption to 10% (7% previously); 2) the doubtful debts provision made during
the quarter; and 3) raising our coal generation mix forecasts to 37.8% (from 30.7%). Given the higher electricity
demand base for FY10, we have lowered our FY11-12 demand growth assumptions slightly to 4.5% p.a. from 5%
p.a.. We have also raised our coal generation mix forecasts to 40-43% from 34-38%. All-in, we have lowered our
FY11-12 net profit forecasts by 1.6-2.7%.

♦ Fair value tweaked down but Outperform call reiterated. Following the earnings revision above, our indicative
fair value has been lowered to RM10.20 from RM10.50, based on target FY11 PER of 13x. Fundamentally, the
strong demand growth thus far helps reaffirm our view that TNB is an excellent proxy to a recovering economy and
we thus, reiterate our Outperform call on the stock.

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Table 4 : Profit Forecasts Table 5 : Forecast Assumptions

FYE Aug (RMm) 2009 2010f 2011f 2012f FYE Aug 2010f 2011f 2012f
Turnover 28,785.6 30,615.0 31,921.2 33,286.2 Average tariff (sen/kWh) 31.3 31.3 31.3
Growth (%) 23.4 6.4 4.3 4.3 Demand (%) – excl. Exports/LPL 10.0 4.5 4.5
Total electricity sales (GWh) 95,622 99,630 103,819
EBITDA 7,260.4 8,299.1 8,912.2 9,488.9 % change 8.9 4.2 4.2
Margins (%) 25.2 27.1 27.9 28.5
Avg coal price (US$/tonne) 90 90 90
Dep/amort (3,561.5) (3,697.9) (3,729.1) (3,744.5) Coal cost/Total fuel cost (%) 48.3% 50.7% 52.9%
Net int inc/exp (949.7) (929.3) (909.8) (829.5) Coal cost/Op cost + dep (%) 19.4% 20.8% 22.0%
Associates 33.1 44.0 44.0 44.0
Investments 0.0 0.0 0.0 0.0 Source: RHBRI
Forex (1,239.2) 0.0 0.0 0.0
Exceptionals 0.0 0.0 0.0 0.0
Pre-tax profit 1,543.1 3,715.9 4,317.3 4,958.9
Tax (690.1) (855.6) (1,006.0) (1,138.2)
Minorities 64.9 86.7 100.7 115.7
Net profit 917.9 2,947.0 3,412.1 3,936.3
Core net profit 2,157.1 2,947.0 3,412.1 3,936.3
Source: RHBRI

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank
(previously known as RHB Sakura Merchant Bankers). It is for distribution only under such circumstances as may be permitted by applicable law. The opinions and
information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be contrary to
opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be construed as an
offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any manner whatsoever
and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons may from time to time
have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of
persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy
will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts any liability for
any loss or damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing
investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB Group
may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity securities or loans
of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other
services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based upon
various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher
risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

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Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended securities,
subject to the duties of confidentiality, will be made available upon request.

This report may not be reproduced or redistributed, in whole or in part, without the written permission of RHBRI and RHBRI accepts no liability whatsoever for the
actions of third parties in this respect.

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