Investment Highlights

• We maintain BUY on Tenaga Nasional (TNB) with a lower DCF-based fair value of RM14.60/share vs. RM15.80/share (terminal growth rate: 2.0%, WACC: 7.0%). We have reduced TNB’s FY20F net profit by 9.9% to account for higher depreciation and interest expenses.

• TNB has declared final and special gross DPS amounting to 70 sen in total for 4QFY19. This brings total gross DPS to 100 sen for FY19, which implies a yield of 8.3%.

• We have forecast a gross DPS of 55 sen for TNB in FY20F, which translates into a yield of 4.5%.

• TNB’s FY19 normalised net profit (adjusted for forex, MFRS 16 and impairments) of RM4.8bil (FY18: RM5.4bil) was below consensus estimates and our expectation of RM5.5bil.

• TNB reported a mere normalised net profit of RM345.6mil in 4QFY19 vs. RM1,373.6mil in 2QFY19. This was due to the loss of capacity payments arising from forced outages at two power plants and higher interest and depreciation expenses.

• The group lost RM300mil worth of revenue when Unit 2 of Janamanjung and Unit 6 of Kapar Energy Ventures (KEV) were shut down in 4QFY19. Both units faced turbine issues. In FY19, Unit 2 of Janamanjung was shut down for 120 days while Unit 6 of KEV was shut down for 151 days.

• We understand that both units at the two power plants have started operations again in January and February 2020. In addition, due to the commissioning of the Jimah East power plant in 2HFY19, TNB’s interest expense climbed by 22.3% QoQ to RM956.4mil and depreciation expense rose by 9% QoQ to RM2.8bil in 4QFY19.

• Operationally, TNB recorded a 2.7% increase in electricity unit sales in FY19. This was underpinned mainly by a 6.8% rise in demand from the residential sector and 3.0% increase in demand from the commercial sector (mainly business services, hotel and retail). Recall that the hot weather in 1QFY19 had prompted many households to switch on air-conditioners.

• On the other hand, electricity demand from the industrial sector (mainly iron, steel, electrical and electronic industries) inched down by 0.1% in FY19 due to slower economic activities.

• TNB posted a lower under-recovery of costs of RM1.9bil in FY19 against RM2.3bil in FY18 as in 4QFY, fuel costs fell lower than the reference rates stipulated under the RP guidelines. Over-recovery of costs amounted to RM80.8mil in 4QFY19 vs. an under-recovery of RM203.8mil in 3QFY19

Source: AmInvest Research - 2 Mar 2020