Investment Highlights

• Maintain HOLD on Tenaga Nasional (TNB) with an unchanged DCF-based fair value of RM13.50/share (terminal growth rate: 2.0%, WACC: 7.9%).

• TNB’s 1QFY19 core net profit was within our expectations and consensus estimates. Although TNB’s 1QFY19 net profit appears to be strong, we are keeping our forecast as TNB will be recognising an RM300mil charge in the P&L pursuant to the new MFRS16 Lease Accounting Standard. TNB did not recognise the RM300mil charge in 1QFY19 as the lease obligation had not come in yet.

• TNB reported a normalised net profit (adjusted for forex and impairments) of RM1,570mil in 1QFY19 vs. RM1,870mil in 1QFY18 and RM1,430mil in 4QFY18.

• Comparing 1QFY19 against 1QFY18, TNB’s normalised net profit fell by 16% YoY to RM1,570mil. The YoY decline in TNB’s normalised net profit in 1QFY19 was due to a higher effective tax rate. Effective tax rate rose to 27% in 1QFY19 from 12% in 1QFY18 as the reinvestment allowance incentives are no longer available. As a result, TNB’s tax expense rose by 85% YoY to RM522.4mil in 1QFY19.

• TNB’s revenue rose by 8% YoY to RM13.2bil in 1QFY19. Electricity unit sales climbed by 5.2% YoY in Malaysia in 1QFY19 (FY18: 2.6%). In spite of the 5.2% YoY increase in 1QFY19, TNB’s effective recognition was only 2% as it returned the excess revenue back to the Electricity Industry Fund pursuant to the revenue and price caps stipulated under Regulatory Period 2 guidelines.

• The YoY improvement in electricity unit sales in 1QFY19 was underpinned mainly by an 11.1% increase in demand from the residential segment.

• Households used more air-conditioning in 1QFY19 due to the hot weather. Demand from the industrial segment (mainly iron, steel and petrochemical industries) grew by 2.2% YoY in 1QFY19 while demand from the commercial segment (mainly business services) was up 4.2%.

• TNB recorded an under-recovery of costs of RM1,369.1mil in 1QFY19 due to the increase in fuel costs. The underrecovery of costs amounted to RM970.7mil in 4QFY18 and RM634.1mil in 1QFY18.

• Going forward, we believe that TNB’s fuel costs would ease as coal and LNG costs have declined. According to Bloomberg, coal price has slid by 31.5% to US$80.75/tonne currently since hitting a high of US$117.95/tonne on 18 July 2018. LNG price (Japan prices) has eased by 60.0% to US$4.725/mmbtu presently since reaching a peak of US$11.805/mmbtu on 17 September 2018.

Source: AmInvest Research - 29 May 2019