Highlights

Tenaga Nasional Berhad - Proposed Internal Reorganisation

Date: 31/07/2019

Source  :  PUBLIC BANK
Stock  :  TENAGA       Price Target  :  14.12      |      Price Call  :  HOLD
        Last Price  :  13.80      |      Upside/Downside  :  +0.32 (2.32%)
 


Tenaga Nasional (TNB) announced that the Board has approved a proposed internal reorganisation, which will result in the transfer of its domestic power generation (GenCo) and electricity retail businesses (RetailCo) to two new wholly-owned subsidiaries of TNB, with each business entity will be under the purview of a separate board and management team. We are positive on the proposed internal reorganisation plan as this will enhance its operational efficiencies and competencies as well as to prepare for the anticipated reforms in the electricity supply industry in Malaysia. The proposed internal reorganisation is not expected to have any material impact to its near-term earnings, hence we make no changes to our forecasts. We maintain our Neutral call on TNB, with unchanged target price of RM14.12. The proposed internal reorganisation is expected to be completed in the 3Q20.

  • Details. TNB will enter into a conditional share and asset purchase agreement for the transfer of assets, liabilities and business undertakings related to the businesses into two new units of GenCo and RetailCo (Figure 1 & 2). Meanwhile, TNB’s principal activities will be on the operation of the national grid and the distribution of electricity to customers (Transmission and Distribution (T&D) Business), the international power generation business, the provision of corporate and/or shared service functions to GenCo and RetailCo and other companies within the TNB Group.
  • The rationale of the proposed internal reorganisation is to separate the regulated and major non-regulated businesses as well as to prepare for the changing landscape of the electricity supply industry in Malaysia. Moving forward, the GenCo is expected to increase the conventional capacity through new power plant plant-ups and repowering projects, increase the renewable energy generation as well as continue expanding the repair and maintenance business (TNB REMACO). Meanwhile, the RetailCo is expected to lead the rooftop solar generation, push-out beyond meter products and energy offerings e.g. battery storage, multi-utility bundling and billing, Fibre-To-The-Home (FTTH) broadband etc.
  • Financial impact. The proposed consideration for the transfers will be the net carrying value (CV) of the assets and liabilities to be finalised upon the completion of the proposed internal reorganisation. As at 31 December 2018, the GenCo has an EBIT of RM1.6bn and net CV of RM12.14bn. Meanwhile, RetailCo has an EBIT of RM0.2bn and net CV of RM1.84bn. TNB is targeting a Group’s EBIT of RM13bn by 2025, from RM6.7bn as at Dec 2018. The growth is expected to derive mainly from the T&D business and its international assets through investment into smart grid and turnaround of its existing international assets. The proposed internal reorganisation is expected to be completed in the 3Q20.
  • Outlook. The electricity industry is set to undergo a transformation through the implementation of the Malaysia Electricity Supply Industry (MESI) 2.0, with the objectives are to; 1) encourage competition along the value chain, 2) increased renewables energy, and 3) increase consumer choices. Nevertheless, we understand that this process will be on a gradual basis, with the earliest to be the liberalisation of the electricity retail sector. The proposed liberalisation of retail sector is currently still at the preliminary stage, with the market segments is expected to be divided into wholesale and retail. We are neutral on this, as the retail sector is estimated to accounts only 3% to its Group’s bottom-line. Meanwhile, the TNB’s domestic generation assets is only estimated to be spin off at the earliest of 2030 upon the expiry of part of its power purchase agreement (PPA), with the T&D business remain as the core business for TNB.

Source: PublicInvest Research - 31 Jul 2019

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