Investment Highlights

• We are keeping our HOLD recommendation on Tenaga Nasional (TNB). Although there is a possibility that the government’s energy reforms may not affect TNB significantly, we prefer to be cautious until the proposals are announced. TNB offered its views during a recent company visit meeting.

• We have a lower DCF-based fair value of RM13.50/share vs. RM14.55/share previously (terminal growth rate: 2.0%, WACC: 7.9%) for TNB. We have revised TNB’s terminal growth rate from 2.5% to 2.0% to account for subdued long-term growth prospects.

• TNB is expected to announce its plans in respect of the National Connectivity Plan in early 2QFY19. The board of directors is still deliberating on the proposals. Hence, we do not know the capex or earnings contribution from the project for now.

• What we know are: (1) TNB will be the wholesaler and not the retailer. Hence, the group would only be laying the infrastructure between the backbone and the poles outside the houses; (2) If TNB proceeds with the project, it would be regulated. Hence like the power sector, TNB would enjoy a fixed rate or return on the regulated assets; and (3) TNB will only be focusing on certain townships if it was to proceed with the project. It will not be a nationwide rollout. TNB spent about RM5mil on its pilot project in Melaka.

• We understand that the liberalisation of the power sector in Malaysia may not have a major impact on TNB.

• First, the removal of the single buyer entity from TNB may benefit TNB instead of hurting the group. This is because TNB would not have to bear fuel risks anymore. The single buyer would have to buy electricity from TNB at the agreed rates and absorb the energy payments. But the risk of whether there would be a fuel pass-through in the form of higher or lower tariff would be borne by the single buyer. Currently, the single buyer is a ring-fenced entity in TNB, which is responsible for purchasing power from different power plants.

• Second, it would not be possible to replicate Singapore’s power-pooling model in Malaysia. This is because there is no element of capacity payments in Singapore. If power pooling is implemented in Malaysia, consumers would have to pay capacity payments to power producers. Capacity payments are part of the PPA between TNB and the power producers. Breaking the PPA may result in a default of bond covenants and affect bondholders. In Singapore, consumers have the option to buy electricity from various parties.

Source: AmInvest Research - 9 Apr 2019