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’s 9MFY19 normalised net profit (adjusted for forex, MFRS 16 and impairments) was within consensus estimates and our expectations.

• Comparing 3QFY19 against 2QFY19, TNB’s normalised net profit sank by 10% to RM1.37bil from RM1.53bil mainly due to a higher effective tax rate, smaller share of net profit in associates and a 2.7% decline in unit electricity demand. TNB’s effective tax rate rose to 22% in 3QFY19 from (-5%) in 2QFY19.

• Electricity demand slid QoQ in 3QFY19 due to weaker demand from the industrial sector (mainly iron, steel, electronic and electrical industries). Demand for electricity from the industrial sector fell by 4.8% in 3QFY19 vs. 2QFY19.

• TNB reported a normalised net profit of RM4.47bil in 9MFY19 compared with RM4.16bil in 9MFY18. The 7% YoY rise in normalised net profit in 9MFY19 can be attributed to a higher share of net profit in associates and a 3.6% increase in unit electricity demand.

• These helped offset a 101.9% YoY surge in interest expense in 9MFY19 resulting from higher gross borrowings. TNB’s gross borrowings climbed to RM47.0bil as at end-September 2019 from RM42.5bil as at end-June 2018 as the group issued sukuk notes in 2HFY18.

• Electricity unit sales improved by 3.6% YoY in Peninsular Malaysia in 9MFY19 (FY18: 2.6%). The 3.6% YoY increase in electricity demand in 9MFY19 was underpinned by the residential segment. Households in Peninsular Malaysia used more electricity in 1QFY19 due to the hot weather. This resulted in electricity demand from the residential segment rising by 7.6% YoY in 9MFY19.

• Electricity demand from the industrial segment rose by 0.6% YoY in 9MFY19 while unit sales of electricity to the commercial segment (business service, hotels and retail) went up by 3.2%.

• TNB recorded an under-recovery of costs of RM2bil in 9MFY19 compared with RM1.36bil in 9MFY18 as fuel costs were higher than the reference rates stipulated under the RP2 guidelines. Under-recovery of costs amounted to RM203.8mil in 3QFY19 against RM425.8mil in 2QFY19.

Source: AmInvest Research - 28 Nov 2019