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Author: kltrader   |   Latest post: Thu, 23 May 2019, 9:25 AM

 

Updates on Tenaga Nasional's Broadband Agenda

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Macquarie Equities Research (MQ Research) recently had meetings with Tenaga Nasional’s (Tenaga) management to discuss the company’s involvement in fibre broadband. While details are still limited at this stage, MQ Research maintains Outperform on Tenaga as the broadband business will only be at the wholesale segment and should have very little impact on the company’s capital management.

Conclusion

  • MQ Research reiterates its Outperform recommendation on Tenaga following recent meetings with management to discuss the company’s broadband agenda. While details remain limited as the board is still deliberating on the matter, it is clear to us that 1) Tenaga will be largely focused on playing a wholesale role, and 2) any venture should have limited impact on the cashflows of Tenaga – and should not distract from MQ Research’s capital management thesis. Meanwhile, at 12x core 19E price-to-earnings ratio (PER), valuations remain attractive vs the market (15x) and gas utilities (20-22x). Reduced regulatory risks and capital management initiatives, MQ Research believes, will be key re-rating catalysts from here.

Impact

  • Wholesale focus. Management were clear in stating that Tenaga aims to play a role in the wholesale element of the broadband agenda rather than get into the retail space. The acquisition of ISP Setia Haruman (for RM28m) in 2018 was to provide Tenaga with the required licences to evaluate this business. Tenaga’s pole and ducts should provide telcos with cheaper access into suburban and rural premises. MQ Research believes a carve out of Telekom Malaysia’s network assets to form the core of a national fibre utility coupled with added access via Tenaga’s poles and ducts plus contributions from the Universal Service Provision (USP) fund would be an ideal starting point for the National Fiberisation and Connectivity Plan (NFCP). MQ Research’s recent meeting with the regulator suggests that they are looking at numerous options including roping in Tenaga at the wholesale level to fulfil the NFCP.
  • Cashflows support higher dividends. Based on the above, MQ Research believes there is limited reason to believe that its thesis of increased capital management initiatives Tenaga will be impacted by Tenaga’s broadband venture. By MQ Research’s estimates, Tenaga’s free cash flows (FCF) to equity yields of >10% will be more than capable of supporting a wholesale broadband venture as well as greater capital management initiatives in light of a clearer regulatory environment.

Earnings and Target Price Revision

  • No change

Price Catalyst

  • 12-month price target: RM15.80 based on a PER methodology.
  • Catalyst: Tariff announcement in May 2019.

Action and Recommendation

  • Outperform reiterated.

12-month Target Price Methodology

  • TNB MK: RM15.80 based on a PER methodology

Source: Macquarie Research - 21 Mar 2019

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