Investment Highlights

• OVERWEIGHT. We have BUYs on Malakoff with a fair value of RM1.00/share and Tenaga Nasional (TNB) with a fair value of RM15.80/share. We believe that Malakoff’s earnings would stabilise in FY20F as unplanned outages at the Tanjung Bin Energy power plant decline. In addition, the proposed acquisition of Alam Flora could lift Malakoff’s net profit by almost 10% on a full-year basis.

• As for TNB, we reckon that the potential spin-off of the transmission and distribution (T&D) and power generation units would help unlock the value of the assets. TNB is currently trading at a FY20F PE of 13.4x. Hence, the spin-off exercise would be value-enhancing if the units are listed at PE multiples of more than 13x.

• We have a HOLD on YTL Power with a fair value of RM0.75/share. The group’s earnings are expected to be hit by declining margins in Singapore and losses in the telco unit due to the non-renewal of the 1BestariNet contract.

• Decent dividend yields. Based on a share price of RM0.895, we forecast Malakoff’s FY20F dividend yield to be 5.6% while TNB’s FY20F dividend yield is expected to be 4.6% (based on a share price of RM13.16). YTLP’s dividend yield is estimated to be 4.4% in FY20F based on a share price of RM0.68.

Outlook and developments in 1H2020

• Electricity volume growth of 2% in 2020F. We have assumed an electricity volume growth of 2.0% for 2020F, which is the same as 2019E (9M2019: 3.6%). Consensus has forecast Malaysia’s GDP growth to be 4.3% in 2020F compared with 4.5% in 2019E. There is risk of a slower growth in Malaysia due to global economic uncertainties. Electricity volume growth in 2020F is expected to be underpinned by the residential and commercial (retail and hotels) sectors. On the back of this, we forecast TNB’s net profit to improve by 1.1% in FY20F and Malakoff’s net profit to grow by 2.0% (excluding acquisition of Alam Flora).

• First impact of energy reforms (Malaysian Energy Supply Industry or MESI 2.0) may be felt in 2021F. The Energy Commission (EC) will offer supplementary agreements to IPPs (independent power producers) so that they can source their own coal and gas requirements as soon as 1H2021. This means that IPPs such as Malakoff would be able to source their own feedstock requirements in FY21F. Depending on the timeliness of their purchases, the IPPs may be able to improve their fuel margins and record higher earnings. The rules and mechanism for fuel sourcing will be published in 3Q2020 or 4Q2020.

• As for the transmission and distribution (T&D) network, the EC and MyPower (an agency set up to drive and implement the energy reforms) would develop rules and guidelines for third-party access in 3Q2020. It is not known if the government would follow the KL Sentral model, whereby Malakoff buys electricity in bulk from TNB and then sell to the end customers or the Australia model, whereby the private sector is allowed to own a stake in the T&D network.

• Ultimately, we think that it would take about 10 years for Malaysia’s energy reforms to be fully implemented. Incidentally, the RP2 (Regulatory Period) Guidelines expire at the end of 2020F. Currently, we believe that the government agencies are engaging with the power companies and preparing the legal and regulatory framework. The EC will make the first disclosure of the power planning plan at the end of 2019 or early 2020F.

• Even though the power industry in Malaysia is expected to be liberalised, we believe that TNB would still be a formidable player in the power industry. This is due to the size of TNB’s balance sheet, proven track record and huge database of customers. Malakoff may be a beneficiary of the liberalisation of the power industry as it would be able to source its own gas/coal requirements and participate in the T&D network.

• Ultimately, the objective of the energy reforms is to make the industry more efficient by driving down production costs. This, in turn, should translate into cheaper energy bills for consumers.

Source: AmInvest Research - 24 Dec 2019