Highlights

Outperform Reiterated on Tenaga Ahead of MESI 2.0

Date: 24/06/2019

Source  :  MACQUARIE GROUP
Stock  :  TENAGA       Price Target  :  15.80      |      Price Call  :  BUY
        Last Price  :  10.08      |      Upside/Downside  :  +5.72 (56.75%)
 


Ahead of further details on the Malaysia Energy Supply Industry (MESI) 2.0 framework, Macquarie Equities Research (MQ Research) reiterates its Outperform rating on Malaysia electricity company Tenaga Nasional (Tenaga). MQ Research believes that the MESI 2.0 framework will allay investor concerns around regulatory risks, and maintains an unchanged target price of RM15.80.

Event

  • MQ Research reiterates its Outperform recommendation on Tenaga ahead of further details on MESI 2.0 framework in 2H19 which MQ Research believes will allay investor concerns around regulatory risks. MQ Research maintains its view that the market continues to overestimate regulatory risks associated with Tenaga.
  • Feedback from local investors also suggest that a recent meeting with key government officials also pointed to an evolution of the regulatory framework under MESI 2.0, rather than a value destroying revolution. As the market accepts this, MQ Research expects a continued rerating of Tenaga’s shares which continue to trade at an undemanding 13x (post FRS16) 20E core price to earnings ratio (PER) vs the KLCI’s 15x and gas utilities at 19-22x. A 4-5% dividend yield with upside risk provides further valuation support, in MQ Research’s view.

Impact

  • Regulatory risk perception to continue easing. While opening up the market to retail competition is a likely first step in MESI 2.0, the experience in other markets suggest that until proper risk management tools; eg, futures contracts for hedging fuel and electricity prices are available, its actual impact will be minimal. Furthermore, the market requires sufficient generation capacity, which is not on power purchase agreements (PPA), to support this market, which MQ Research believes will only be available c.2025. Even in a liberalised market MQ Research believes, Tenaga’s core transmission and distribution wires business will remain a monopoly.
  • In the meantime MQ Research builds into its estimates a further 0.2ppt reduction in the regulated weighted average cost of capital (WACC) to 7.1% for the third regulatory period (RP3) (2021-2023).
  • Capital management still to be delivered. With free cash flow (FCF) yields set to rise on lower generation capex and FCF to equity at >10%, MQ Research believes there is significant room for Tenaga to return excess capital. Additionally a move replicate the 55% debt to equity mix allowed under the incentive based regulation (IBR) could release up to RM8.55/sh, by MQ Research’s estimates.

Earnings and Target Price Revision

  • MQ Research lowers its FY20/21 core profit estimates by 6.1%/5.6% largely on MFRS16 adjustments. On a like-for-like basis MQ Research’s estimates are reduced by 0.1% and 0.3%, respectively. MQ Research’s PER (15x) derived price target is unchanged at RM15.80.  

Price Catalyst

  • 12-month price target: RM15.80 based on a PER methodology.
  • Catalyst: Announcement of MESI 2.0 plans in 2H19.

Action and Recommendation

  • Outperform maintained.

12-month Target Price Methodology

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

Source: Macquarie Research - 24 Jun 2019

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