Investment Highlights

• Maintain HOLD on Tenaga Nasional (TNB) with a lower DCF-based fair value of RM14.65/share vs. RM15.65/share previously (terminal growth rate: 2.5%, WACC: 7.9%).

• TNB’s 9MFY18 results were below our expectations and consensus estimates. We have reduced TNB’s FY18E net profit by 18.7% to account for increases in fuel costs, staff costs, and repairs and maintenance costs. We have also revised TNB’s share of net profit in associates downwards.

• TNB reported a normalised net profit (adjusted for forex, reinvestment allowances and impairments) of only RM0.89bil in 3QFY18 compared with RM1.39bil in 2QFY18 and RM1.71bil in 1QFY18.

• TNB was hit by a 20% QoQ increase in fuel costs, 22% QoQ rise in repairs and maintenance costs and 24% QoQ climb in staff costs in 3QFY18.

• There was a mismatch between fuel costs and the ICPT (Imbalance Cost Pass-Through) mechanism in 3QFY18. We could not reconcile the numbers provided by TNB and will seek clarification at a later date.

• Under the ICPT mechanism, TNB is supposed to pass on the increase in fuel costs in the form of higher revenue. However, the increase in fuel costs arising from higher coal costs, was offset against sales of electricity made by the single buyer. This resulted in a lower ICPT revenue charge in 3QFY18. The single buyer is a ring-fenced arm operating independently within TNB that determines how much each power plant generates daily.

• Staff costs rose by 24% QoQ in 3QFY18 due to a salary adjustment for non-executive workers. This is pursuant to a collective agreement between TNB and the workers.

• Included in TNB’s reported net profit in 3QFY18 was an impairment of RM291.5mil in respect of its investment in 30%-owned Gama Enerji in Turkey. TNB had already recorded an impairment of RM206.5mil on Gama Enerji in 2QFY18. TNB said that it has fully written off its investment in Gama Enerji.

• TNB recorded an under-recovery of costs of RM1.36bil in 9MFY18. The under-recovery of costs amounted to RM479.6mil in 3QFY18 compared with RM634.1mil in 1QFY18 and RM245.2mil in 2QFY18.

• TNB does not expect the MFRS16 lease accounting standard to affect its net profit significantly in FY19F. However, it would only provide more guidance next year when the numbers have been reviewed by the auditors.

Source: AmInvest Research - 28 Nov 2018