Investment Highlights

• We maintain BUY on Tenaga Nasional (TNB) with a lower DCF-based fair value of RM13.95/share (terminal growth rate: 2.0%, WACC: 7.0%) vs. RM14.60/share previously. We expect TNB’s earnings to recover by 29.8% in FY21F after falling by 18.5% in FY20F due to the Covid-19 pandemic. TNB’s FY21F dividend yield is estimated to be 4.6%. FY21F PE is undemanding at 13.3x.

• We have reduced TNB’s FY20F net profit by 21.8% to account for an electricity demand growth of -6.0% vs. 2.0% originally. TNB reckons that electricity demand would decline by 7% to 15% in FY20F. If there is a second wave of the Covid-19 outbreak, electricity demand may fall by 15%. For FY21F, we have assumed that electricity demand would rebound by 9.5%.

• On an annualised basis, TNB’s 1QFY20 normalised net profit of RM1,124.7mil (adjusted for forex, MFRS16 and impairments) was 10.5% below consensus estimates and 16.7% short of our expectations.

• TNB’s normalised net profit fell by 29.3% to RM1,124.7mil in 1QFY20 from RM1,591.7mil in 1QFY19 due to lower sales volume of electricity and higher interest and depreciation expenses. Also, TNB opted to be prudent in 1QFY20 by recording a provision for doubtful debts of RM99.1mil.

• Due to the two-week movement control order in March 2020, sales volume of electricity declined by 1.9% YoY in 1QFY20. Also recall that in 1QFY19, TNB’s electricity demand growth was high at 5.2% as households used more air-conditioning during the hot weather.

• Electricity demand from the industrial sector (mainly iron, steel, electrical and electronic industries) slid by 7.5% YoY in 1QFY20. However, electricity demand from the residential segment (mainly households) rose by 5.8% YoY in 1QFY20 while sales volume of electricity to the commercial sector (business services, hotels and retail outlets) edged down by 0.1%.

• TNB’s net interest expense climbed by 37.9% YoY to RM794.3mil in 1QFY20 while depreciation expense rose by 5.4% to RM2,590mil. Net interest expense surged YoY in 1QFY20 as TNB drew down RM1bil for working capital. Depreciation expense increased as TNB commissioned the 2000MW Jimah East power plant in late FY19.

• TNB recorded an over-recovery of costs of RM307.5mil in 1QFY20 vs. an under-recovery of costs of RM1,369.1mil in 1QFY19 and over-recovery of costs of RM80.8mil in 4QFY19. TNB incurred over-recovery of costs of RM307.5mil in 1QFY20 as fuel costs had fallen below the reference rates stipulated in the RP2 (Regulatory Period 2) guidelines.

Source: AmInvest Research - 11 Jun 2020