Investment Highlights

• We are upgrading our recommendation on Tenaga Nasional (TNB) to BUY from HOLD with a higher fair value of RM15.80/share (vs. RM13.50/share previously). We have reduced our WACC assumption in TNB’s DCF to 7.0% from 7.9%.

• TNB’s new corporate structure could be paving the way for a demerger exercise. This could substantially boost the valuations of its generation assets as a separately listed generation company (which is effectively an IPP with water-tight PPAs) carries a much lower regulatory risk, and hence risk premium and discount rate. There are no changes to our earnings forecast as for now, TNB still owns 100% of all of the assets.

• TNB has proposed an internal reorganisation of its businesses. TNB’s domestic generation assets will be placed under a new subsidiary while the retail and rooftop solar businesses will be placed under another subsidiary. TNB, as a holding company, will hold the transmission, distribution and international businesses.

• The assets and liabilities will be transferred at the net carrying value as at 1 July 2020. The deadline for the legal process to transfer the assets and liabilities through a scheme of arrangement is 1HFY20. The new corporate structure is targeted to be in place in 3QFY20. Recall that Regulatory Period 2 Guidelines for the power industry lasts until the end of year 2020.

• For illustrative purposes, the net carrying values as at 31 December 2018 were RM12.14bil for the power generation assets and RM1.84bil for the retail assets.

• Amongst other things, TNB said that the proposed reorganisation will prepare the group for anticipated electricity market changes. TNB said that the proposed reorganisation will place the group in an advantageous position to compete in the future.

• Additionally, the separation of regulated and unregulated businesses through the creation of the power generation and retail companies will provide TNB’s shareholders with greater transparency of the financial and businesses performances of each entity.

• TNB has set a target for the three separate entities to achieve a combined EBIT of RM13bil in FY25F compared with RM6.7bil in FY18. TNB hopes that the EBIT of RM13bil will be achieved through savings from procurement policies and improvement in operational efficiencies.

• The retail co’s target is an EBIT of RM0.7bil in FY25F vs. RM0.2bil in FY18 while TNB’s (transmission, distribution and international businesses) target is an EBIT of RM9.7bil in FY25F against RM4.9bil in FY18. The gen co’s EBIT target is RM2.6bil in FY25F compared with RM1.6bil in FY18.

Source: AmInvest Research - 31 Jul 2019