Tenaga Nasional - Getting Ready For Market Reform

Date: 31/07/2019

Source  :  KENANGA
Stock  :  TENAGA       Price Target  :  13.40      |      Price Call  :  HOLD
        Last Price  :  13.48      |      Upside/Downside  :  -0.08 (0.59%)

TENAGA has revealed an internal restructuring to split power generation and retail businesses into RetailCo and GenCo that will have their own board and management teams. This is to pave the way for the impending market reform. We maintain that the fears of open competition is overplayed given that RetailCo would only contribute <3% to group earnings. Until market could accept that such risk is manageable, MP is the best call for TENAGA currently.

Internal reorganisation in place. On Monday, TENAGA announced a proposed internal reorganisation which will see two new wholly-owned subsidiaries set up to house the domestic power generation business (GenCo) and the electricity retail business (RetailCo) while the structure for the remaining businesses such as transmission and distribution network, international business and corporate centre remains unchanged at the group level. These two new entities shall have their own separate board and management teams. This reorganisation is expected to be completed by 3Q20. In all, it is to prepare for the upcoming reforms in the electricity supply industry with the Energy Minister expecting to reveal the Malaysia Electricity Supply Industry (MESI) 2.0 next month.

Two new entities to prepare for the reform. As the retail business is highly anticipated to open up for new comers, RetailCo is prepared to improve efficiency to increase customer collection rate, which is currently slightly <1 sen/kWh and at the same time it will involve rooftop solar generation as well as pushing beyond energy offerings such as multi-utility bundling and billing, Fibre-to-the-Home broadband, or sales of 3rd parties’ products. Meanwhile, besides conventional capacity, GenCo is aiming to improve RE generation through participation in Large-Scale Solar (LSS) scheme. In addition, GenCo will continue to go for offshore expansion for its O&M business under REMACO. For assets size indication, the pro-forma FY18 book value for RetailCo was c.RM1.84b against the group’s book value of RM59.05b while GenCo has a book value of RM12.14b.

Group earnings to double by 2025. Contributions from these two entities are fairly small for the moment, with RetailCo’s EBIT of RM0.2b only making up <3% of Group FY18 EBIT of RM6.7b while GenCo’s RM1.6b accounted for 5.4% of group earnings. As such, the fears of opening up retail business are seen as overly played. TENAGA is aimed to target EBIT of RM13.0b by 2025 with RetailCo earnings growing to RM0.7b with GenCo earnings to increase to RM2.6b. Given the regulated IBR framework, this aim is a tall order which means it has to grow its non-RAB business tremendously especially the international business in order to double its earnings. This is despite that fact that TENAGA may lose out some earnings for RetailCo and eventually GenCo as well if this segment is opened up.

More clarity but MP for now. There is higher clarify now pertaining to RetailCo earnings, but we believe the market may need time to digest while waiting for the announcement of MESI 2.0. Thus, we maintain our MARKET PERFORM rating with an unchanged target price of RM13.40, which is based on 13.6x FY20 PER, in-line with 1SD-band below its 2-year mean. Our recommendation is supported by 3-4% yield. Overall, this restructuring is paving the way for the market reform and the impending new structure could lead to two separate listing entities under two segments. Risks to our recommendation are: (i) the stronger-than-expected earnings from non-regulated business as well as (ii) a higher dividend payout.

Source: Kenanga Research - 31 Jul 2019

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