Investment Highlights

• We are keeping our BUY recommendation on Tenaga Nasional (TNB) with an unchanged DCF-based fair value of RM15.80/share (terminal growth rate: 2.0%, WACC: 7.0%).

• TNB declared a gross DPS of 30.0 sen in 2QFY19 (1HFY18: 30.27 sen). We have forecast a gross DPS of 55 sen in FY19E, which implies a yield of about 5%.

• TNB’s 1HFY19 normalised net profit (adjusted for forex, MFRS16 and impairments) was slightly below our expectations but within consensus estimates. We have reduced TNB’s FY19E net profit by 2.1% to account for a higher-than-expected interest expense.

• At first glance, TNB’s 1HFY19 results appear to be strong. However, we expect TNB’s effective tax rate to normalise to the 24% to 26% level in 2HFY19. TNB’s effective tax rate was exceptionally low at 16% in 1HFY19 as the group reversed prior year’s excess provisioning.

• TNB’s interest expense surged by 113.1% YoY to RM1.6bil in 1HFY19 due to higher borrowings and recognition of interest for a leased asset. This is pursuant to the implementation of the MFRS16, which is the new lease accounting standard.

• TNB reported a normalised net profit of RM1,530mil in 2QFY19 vs. RM1,570mil in 1QFY19. Normalised net profit was RM3,100mil in 1HFY19 compared with RM3,360mil in 1HFY18.

• TNB’s normalised net profit slid by 5% YoY in 1HFY19 mainly due to higher finance costs pursuant to the increase in gross borrowings. TNB’s total borrowings rose to RM46.8bil as at end-June 2019 from RM42.5bil as at endJune 2018. The group issued sukuk notes in 2HFY18.

• TNB’s revenue rose by 5.0% YoY to RM26.1bil in 1HFY19. Electricity unit sales climbed by 4.4% YoY in Peninsular Malaysia in 1HFY19 (FY18: 2.6%), which was close to the GDP growth of 4.7%.

• The 4.4% YoY rise in electricity demand growth in 1HFY19 was driven mainly by the residential segment. Electricity demand from the residential segment grew by 8.7% YoY in 1HFY19 while demand from the industrial segment (mainly iron, steel and paper manufacturers) improved by 2.4%. Electricity unit sales from the commercial segment (mainly business services and retail) rose by 3.6% YoY in 1HFY19.

Source: AmInvest Research - 3 Sept 2019