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Author: kltrader   |   Latest post: Fri, 18 Jan 2019, 09:53 AM

 

Tenaga: Outperform Reiterated With Target Price of RM15.80

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Tenaga Nasional (Tenaga) recently announced a tariff hike to 2.55sen/kWh for non-household users from 1 March to 30 June this year. Following this, Macquarie Equities Research (MQ Research) wrote a report dissecting Tenaga’s future earnings, and concluded that Tenaga’s price-to-earnings ratio (PER) is at 3x if the market is rightly pricing regulated assets. MQ Research maintains Outperform on Tenaga with a target price of RM15.80.

Conclusion

  • MQ Research dissected Tenaga’s earnings profile going forward and deduced that if the market is indeed efficient and has already valued Tenaga’s regulated business in line with regional transmission and distribution (T&D) assets (18.6x FY19E PER), following the recent tariff increase, then it is ascribing an undemanding 3x PER on Tenaga’s non-regulated business.
  • The second sequential effective tariff increase, the structure of the recent tariff surcharge and easing thermal coal prices all suggest regulatory risks are abating. The next step MQ Research believes will be capital management initiatives to further unlock shareholder value. Outperform.

Impact

  • What if the market is indeed efficient? The Incentive Based Regulations (IBR) provide Tenaga with RM3.7bn in profits (65% of group profits) in FY19E, which if MQ Research assumes is being priced at 18.6x PER, in line with regional transmission and distribution assets, would suggest its non-regulated businesses comprising its Malaysian and overseas generation businesses are being priced at 3x PER vs regional peers at 12.2x. Greater clarity on these non-regulated earnings should, in MQ Research’s view, aid the rerating of this segment. Utilising regional valuations as a basis would value Tenaga at RM17.14 vs MQ Research’s current RM15.80 (15x PER) valuation.
  • Tariff risks reduced further. In addition to putting through its second consecutive effective tariff increase, the (new) government’s decision to delay the implementation of the higher surcharge to March instead of January, reduces tariff related risks further. By delaying the effective date of the tariff surcharge, the effective surcharge has been increased to 2.55sen/kWh vs 2.35sen/kWh. This provides some leeway at the next tariff setting for 2H19. Also helping matters is the recent pullback in thermal coal prices.
  • Reforms to come, but urgency for Tenaga reduced. Industry players confirm that the re-establishment of MyPower is underway, and that the plan is for the sector to be reformed within three years. However, for Tenaga, MQ Research believes the urgency around the removal of the ring fenced entities to mitigate policy risks has been reduced with the government’s recent tariff decisions.

Earnings and Target Price Revision

  • No change.

Price Catalyst

  • 12-month price target: RM15.80 based on a PER methodology.
  • Catalyst: Next tariff adjustment announcement in late 2Q19 for 2H19.

Action and Recommendation

  • Outperform reiterated.

Source: Macquarie Research - 10 Jan 2019

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