Investment Highlights

• We maintain BUY on Tenaga Nasional (TNB) with an unchanged DCF-based fair value of RM15.80/share (terminal growth rate: 2%, WACC: 7.0%).

• Tenaga’s dividend yield is estimated to be 4.4% in FY20F based on a gross DPS of 57 sen. We have assumed an electricity demand growth of 2.0% for TNB in FY20F (FY19: 2.0%).

• We see several issues in TNB. First, the risk of new entrants in the T&D (transmission and distribution) segment. We believe that as TNB owns the grid network, any third-party access would be priced accordingly.

• However, we do not expect a gain or loss as the pricing for third-party access would be based on redundancy costs and the regulated rate of return of 7.3% as stipulated in the RP2 (Regulatory Period 2) or RP3 guidelines. The RP2 will be expiring at the end of year 2020F. TNB is currently in discussions with the government on the RP3.

• In any case, we believe that TNB would still be the dominant player in the power industry due to the group’s size, huge customer database, strong balance sheet and proven track record.

• Second, TNB is expected to reap cost savings from sourcing part of its fuel supply from other parties and not just Petronas (for gas) in the long term. Under the 10-year Energy Master Plan, IPPs would be allowed to source coal and gas from third parties.

• Recall that in October 2019, TNB signed a sales agreement with Shell Malaysia Trading to take delivery of gas for its maiden LNG trial cargo of 3.6 trillion BTU, which were used by its two power plants in Klang and Port Dickson. TNB’s daily average gas requirements were about 3,790 mmscfd in FY18. We think that TNB’s gas requirements would increase in FY21F when the 51%-owned Southern Power generation plant in Johor comes onstream in July 2020.

• Third, we do not expect TNB to record any provision in respect of its additional tax assessments from the Inland Revenue Board. TNB has received an interim stay of all proceedings including the enforcement of the additional tax assessments until the court hearing on 2 April 2020. To recap, in December 2019, TNB received additional tax assessments of RM4bil for years of assessments from 2015 to 2017 from the Inland Revenue Board.

Source: AmInvest Research - 16 Jan 2020