Investment Highlights

• Maintain BUY on Tenaga Nasional (TNB) with an unchanged DCF-based fair value of RM17.25/share (terminal growth rate: 1.5%, WACC: 7.9%). We like TNB for its earnings stability and attractive dividend yield of 5.8% for FY19F.

• Here are the key takeaways from our meeting with TNB:
  1) First, TNB is unable to assess the cost of implementing the pilot project for the National Connectivity Plan (NCP). This is because the capex would depend on the take-up rate by the households and whether there is a retailer, which will set up the connection from the poles to the households. The pilot project is expected to be completed by year-end. Hence, we would only know the amount of capex next year.
  TNB’s role in the pilot project is to develop the access or fibre lines between the backbone or core network and the poles outside the house. Through the pilot project, TNB will get a sense of the viability of the NCP and the capex involved. To recap, TNB recently announced that it would start the pilot project involving 1,100 out of 4,300 houses in Taman Merbau, Taman Maju and Felda Kemendor, Jasin.
  2) Second, as fuel costs have gone up in 2H2018, we believe that the government would approve a hike in the electricity tariff in 1H2019 via a surcharge (2H2018: surcharge of 1.35 sen/kWH amounting to RM698.2mil in total). Similar to 2H2018, we reckon that the potential hike in 1H2019 would affect industrial and commercial customers only.
  We think that the domestic market (mainly residential) would still be subsidised by the Electricity Industry Fund. We believe that the fund has enough reserves to subsidise the domestic market in 1H2019. We estimate that the fund has RM620mil left after taking out subsidies of RM140mil for the domestic market in 2H2018. In terms of electricity demand, we forecast that sales volume would inch up by 3.0% in FY18E (1HFY18: 2.7%).
  3) Third, TNB has not faced any pressure from the regulators to segregate the regulated (transmission and distribution) and non-regulated (generation) assets yet. However internally, TNB is preparing for this. TNB has started to identify each entity and its contribution and to account for the unbundling of assets.
  4) Fourth, TNB is evaluating the potential sale of its 235MW power plant in Pakistan. TNB’s investment cost in the plant was US$272mil. At the same time in Turkey, TNB is considering increasing its investment in Gama Enerji from 30% to 80.5% even though the investment was impaired by RM206.5mil in 2QFY18. We understand that Gama Enerji has sound fundamentals. Also due to the depreciation of the Turkish lira, assets in Turkey are now cheap.

Source: AmInvest Research - 5 Oct 2018