Investment Highlights

• Maintain HOLD on Tenaga Nasional (TNB) with a lower DCF-based fair value of RM14.55/share (terminal growth rate: 2.5%, WACC: 7.9%) vs. RM14.65/share previously. Going forward, TNB may face regulatory risks as the Malaysian government mulls ways to make the power industry more competitive.

• We have reduced TNB’s FY19F net profit by 7.6% to account for the reversal of excess revenue resulting from a better-than-expected customer mix. Included in TNB’s reported net profit were impairments of RM802.7mil for its associates i.e. Gama Enerji in Turkey and GMR Energy in India. TNB has fully provided for Gama Enerji.

• TNB’s FY18 normalized net profit (adjusted for forex, reinvestment allowances and impairments) of RM5.4bil was within our expectations but below consensus estimates of RM6bil. After a weak 3QFY18, TNB’s normalised net profit rebounded by 63.0% QoQ to an estimated RM1.45bil in 4QFY18 due to lower fuel and staff costs.

• However comparing 4QFY18 against 3QFY18, turnover dropped by 4% to RM12.5bil due to regulatory adjustments amounting to RM639.8mil. This comprised reversals of excess revenue of RM442.9mil and RM196.9mil worth of refunds such as refund of interest on customer deposits.

• The excess revenue came about as TNB’s customer mix was more favourable than the one stipulated under the Regulatory Period 2 Framework. The excess revenue will be used to offset part of the tariff surcharge for nondomestic customers (mainly commercial and industrial customers) in Malaysia in 1HFY19.

• TNB recorded a 2.6% increase in electricity unit sales in FY18. This was driven mainly by a 3.6% expansion in demand from the industrial segment (mainly electric and electrical industries) and a 1.6% improvement in demand from the residential sector. Unit sales of electricity to the commercial sector (mainly hotels) grew by a mere 1.1% in FY18. We have assumed that electricity demand would grow at 2.0% in FY19F.

• TNB recorded an under-recovery of costs of RM2.3bil in FY18 due to the increase in fuel costs. The under-recovery of costs amounted to RM970.7mil in 4QFY18 compared with RM479.6mil in 3QFY18, RM245.2mil in 2QFY18 and RM634.1mil in 1QFY18.

• Overall, TNB reported a normalised net profit (adjusted for forex, reinvestment allowances and impairments) of RM1.45bil in 4QFY18 compared with RM0.89bil in 3QFY18, RM1.39bil in 2QFY18 and RM1.71bil in 1QFY18.

Source: AmInvest Research - 1 Mar 2019