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Author: PublicInvest   |   Latest post: Tue, 21 May 2019, 9:49 AM

 

Tenaga Nasional Berhad - Share Placement By Khazanah

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Bloomberg reported that Khazanah Nasional has sold 85m shares in Tenaga Nasional (TNB) at RM12.33 per share. Following this, TNB share price fell by as much as 6% yesterday, before settling at -4%. YTD, it has contracted by 21.2%, largely due to lower rate of return on regulated asset base (RAB) of 7.3% set in the second regulatory period (RP2: 2018-2020), compared to 7.5% in RP1 (2015-2017). While the incentive based regulation (IBR) framework would cap the return on TNB’s regulated assets, we believe its profitability could still be improved through cost efficiency and higher return on its non-regulated assets. We are maintaining our earnings forecasts with an unchanged DCF-based target price of RM14.12. Although yesterday’s sentiment was dragged by news on Khazanah’s disposal, TNB’s fundamental remains unaffected and hence, we see the weakness in share price as a good opportunity to accumulate. Our TP implies an upside potential of 17% and therefore, we upgrade our call from Neutral to Trading Buy. Also note that at current market price, TNB’s dividend yield of 4% looks attractive.

  • Details on Khazanah’s sale of TNB shares. TNB announced that Khazanah has disposed 85m of shares yesterday. This accounted for only 1.5% stake in TNB, resulting in Khazanah’s shareholding falling to 27.27%, from 28.76% previously. Khazanah remains the single largest shareholder of TNB. According to Bloomberg, the disposal of shares by Khazanah was worth c.RM1bn at a price of RM12.33 per share. This represents a 2% discount to its last closing price of RM12.58. Although we believe the disposal is part of asset value realisation by Khazanah, TNB remains a strategic holding of the Malaysian sovereign wealth fund.
  • Lower rate of return under RP2 was price-in. Share price has contracted by 21.2% YTD, largely due to lower rate of return on RAB of 7.3% set in the second regulatory period (RP2: 2018-2020), compared to 7.5% in RP1 (2015-2017). Given that TNB’s market capitalisation has declined by RM18.5bn or 21.2% YTD, compared to a loss in revenue of c.RM640m in FY18, we feel the selldown is over-rated.
  • Volatility to fuel and generation costs is neutral to TNB. Under the IBR framework, any price adjustment on fuel and generation costs from the parameters set on its base tariff will be pass-on to consumers under imbalance-cost-pass-through (ICPT) mechanism for every 6 months. For the upcoming review in June 2019, we believe there is less pressure to hike the base tariff on residential customers due to the falling coal prices. In any case, we believe there is still remaining funds available (we estimate the savings is close to RM1bn, after including the excess revenue collected from FY18) in the Kumpulan Wang Industri Elektrik (KWIE) to be used to subsidize any residential customer surcharge.

Source: PublicInvest Research - 12 Apr 2019

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