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Tuesday, April 17, 2007

TENAGA - News on Dividend Policy

Biznewsdb.com has a post on TENAGA this morning ... over the course of today and tomorrow, I expect more updated news to be posted there ... it should be interesting to watch how TENAGA share price behaves over what is supposed to be "good news" over the next couple of days. If TENAGA share price does not rise further, it's probably a sign that "distribution" has occured, and in the absence of more good news, the more likely immediate trend then would be for the price to head south ... Of course, in real life, things are never equal and rarely that simple - e.g. it is always possible that there could be a sudden large inflow of foreign funds and volume say next week that could push prices up (in the midst of a downtrend), etc. so, all my comments here should be taken within the context of probabilities, rather than certainties.


Tenaga's Profit Soared To Record in 2nd Quarter Updated :
17-04-2007 Media :
Dow Jones Story By : ELFFIE CHEW
via www.biznewsdb.com

KUALA LUMPUR, Malaysia -- Tenaga Nasional Bhd., Malaysia's biggest company by market value, reported a record quarterly net profit for the fiscal second quarter due to stronger foreign-exchange gains, tax writebacks and rising power demand.

The state-owned utility's net profit for the quarter ended Feb. 28 rose to 1.55 billion ringgit ($450.4 million) from 399.5 million ringgit a year earlier, which was above the one billion ringgit to 1.3 billion ringgit forecast range of four analysts surveyed by Dow Jones Newswires.

Revenue increased 18% to 5.68 billion ringgit from 4.83 billion ringgit a year earlier, reflecting higher sales as well as the higher price of electricity from June 1.

Foreign-exchange gains amounted to 437.6 million ringgit, compared with 126.1 million ringgit a year earlier, the company said.

Tenaga also said it aims to return 40% to 60% of its annual free cash flow as dividends, its first-ever dividend-policy guidance. It also declared an interim dividend of 0.10 ringgit a share.

Second-quarter results improved despite higher costs resulting from the commencement of the Tanjong Bin Phase 1 power plant, the company said. Chief Executive Che Khalib Mohamad Noh said that for the first half, the company paid 220 million ringgit for power supplied by Tanjong Bin and will pay 630 million ringgit to buy 85% of the capacity from the first two phases of the plant for the fiscal year ending Aug. 31.

The three-phase, 2,100-megawatt, coal-fired power plant is being developed by independent power producer Malakoff Bhd. The third phase of the project will begin operations in September.

Tenaga said it expects the performance for the rest of the year to "continue to be encouraging" but didn't elaborate.

Mr. Che Khalib said the company should be able to improve on its operating profit in the second-half. Operating profit for the first half was three billion ringgit, compared with 1.73 billion ringgit a year earlier.

He said the higher operating profit will be driven by continued strong demand for power from the industrial sector. "The industrial sector accounted for 50% of Tenaga's total demand [in the first half]."

Mr. Che Khalib said overall power demand for the first half rose 6%, compared with 3% growth a year earlier, and he expects "electricity demand to be sustained in the second half."

Most of the content above are largely as reported. For Phase 2 of Tanjung Bin, management naturally opted for the lowest capacity payment (85%, instead of say 100%) due to current excess capacity, and so, the payment of $630M is smaller than what I used to estimate intrinsic value earlier.

To me, the most interesting news from above is the dividend policy. We should be able to estimate roughly how much the dividend might be. To me, the first issue is the definition of "annual free cash flow" since it is not defined in the article. My educated guess would be the "Changes in cash and cash equivalents" in the Consolidated Cash Flow Statement, but to be honest, I can never be 100% sure. I would like to think that what's distributed to shareholders should be after investing (e.g. after capex) and after financing (e.g. after repayment of bank borrowings). This would seem to be a more prudent and responsible way to run a company. Of course one could argue that if operational cash is guaranteed to be strong, then, why can't TENAGA just take new loans to pay dividends, but that is not what I would personally deem to be a prudent way to run a business. Still, it is important to watch how TENAGA management defines it, as it would give important clues as to the thinking of their management.

So, assuming it is the "annual net free cash flow" (i.e. net of investing and financing activities), this gives a H1/07 figure of approximately $2B. Annualize this gives $4B, and taking the mid-point of 40%-60% suggests a possible dividend distribution of $2B. A 10 sen gross interim dividend will cost TENAGA approximately $315M net of tax, so, $2B suggests that the final dividend might be quite generous, perhaps 5 times larger, say 50 sen gross. It will certainly be much larger than the final dividend paid in previous years which is only 14 sen in 2006 and 12 sen in 2005. Of course, my 50 sen final dividend is only a personal guess, and the actual value will depend on a number of variables, such as whether the company adopts a 50% figure, the actual definition, and the actual result and period for the annual free cash flow to be used in the calculation.

If the total dividend figure is 60 sen gross, this would translate to a gross dividend yield of say 5% p.a. (assuming $12 TENAGA share price). It would be interesting to watch how the market reacts to this news. For TENAGA warrant holders, it will be important to look out for the ex-Dividend date since warrant holders do not receive the dividends, but could potentially suffer from a fall in TENAGA prices on ex-Div date, if the prices don't recover immediately.

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