Investment Highlights

• We maintain BUY on Tenaga Nasional (TNB) with an unchanged DCF-based fair value of RM13.95/share (terminal growth rate: 2.0%, WACC: 7.0%). TNB is currently trading at a FY21F PE of 12.6x.

• We forecast gross DPS of 35 sen for FY20E and 55 sen for FY21F (FY19: 100.0 sen). These imply net payouts of 50.7% of FY20E net profit and 61.3% of FY21F net profit. TNB’s free cash flows are estimated to be 111.9 sen in FY20E and 131.7 sen in FY21F compared with 160.7 sen in FY19.

• We expect TNB’s normalised net profit (excluding forex and impairments) to rebound in FY21F after a pandemic-hit FY20E. We forecast TNB’s normalised net profit to climb by 29.8% in FY21F after falling by 18.5% in FY20E. We estimate electricity demand growth to be 9.5% in FY21F after a decline of 6.0% in FY20E.

• When TNB’s revenue exceeds the revenue and/or price caps stipulated under the RP 2 (Regulatory Period 2) guidelines, the excess revenue is returned to the Energy Industry Fund. TNB transferred RM774mil to the Energy Industry Fund in FY19.

• As TNB’s revenue is expected to fall below the revenue or price caps in FY20E due to the MCO (movement control order), we believe that the group would not be returning any surplus to the Energy Industry Fund this year.

• We anticipate TNB’s 2QFY20 results to be weak due to the MCO. We think that TNB’s unit sales of electricity would fall by 15% to 20% YoY in 2QFY20 (1QFY20: -1.9% YoY).

• According to TNB’s 1QFY20 presentation slides, electricity sales volume slid by 12.6% in April 2020 from April 2019 and by 24.5% in May 2020 from May 2019. In June 2020, we think that TNB’s sales volume eased by less than 10% YoY as a relaxation of the MCO resulted in increased manufacturing activities.

• Finally, we think that it would take time for TNB to resolve the notices of additional tax assessments. In respect of the notices of additional tax assessments for YA2013 and YA2014, there is no hearing date yet. In respect of the court hearing on 3 September 2020 for YA2015 to 2017, the unfavourable party is expected to appeal against the court’s decision.

• In any case, TNB is not expected to record any tax provision or liability on the notices of additional tax assessments. Recall that the notices of additional tax assessments amount to RM7.9bil in total for YA2013 to YA2018

Source: AmInvest Research - 23 Jul 2020