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%). We believe that TNB is a proxy to Malaysia’s economic recovery in FY21F.

• TNB’s 1HFY20 normalised net profit of RM1.89bil (adjusted for forex losses, electricity sales discounts and Covid-19 contribution) was within our forecast but more than 20% below consensus. TNB recognised electricity discounts of RM125mil in 2QFY20. The balance of RM125mil will be recognised in 3QFY20.

• TNB has declared a lower gross interim DPS of 22 sen in 1HFY20 vs. 30 sen in 1HFY19. We have assumed a gross DPS of 35 sen for the full year (FY19: 100 sen), implying a yield of 3.2%.

• TNB’s normalised net profit declined by 38.9% YoY to RM1.89bil in 1HFY20 on an 8.5% drop in electricity sales volume and increases in interest expense, depreciation expense and effective tax rate. TNB’s effective tax rate rose to 32% in 1HFY20 from 16% in 1HFY19 on lower capital allowances resulting from a delay in the completion of certain projects.

• TNB was also affected by the loss of capacity payments of RM48.3mil in 2QFY20 due to shutdowns at the Manjung 5 power plant resulting from a turbine issue.

• Electricity demand from the industrial sector in Peninsular Malaysia slid by 15.3% YoY in 1HFY20 while sales volume of electricity to the commercial sector dropped by 14.6%. On a positive note, residential households consumed more electricity as reflected in the sales growth of 11.8% YoY in 1HFY20.

• Industrial customers accounted for 37.0% of TNB’s electricity sales volume in 1HFY20 while commercial customers accounted for another 32.1%. Residential households made up another 28.8% of electricity sales volume while others (mining, agriculture, public lighting, etc.) accounted for the balance 2.1%.

• Comparing 2QFY20 against 1QFY20, TNB’s normalised net profit shrank by 31.7% as the movement control order (MCO) affected electricity demand.

• Sales volume of electricity in Peninsular Malaysia slipped by 8.4% QoQ in 2QFY20 led by the industrial sector. Sales volume of electricity to the industrial customers dived by 11.5% QoQ in 2QFY20 while electricity demand from the commercial customers plunged by 23.8%.

Source: AmInvest Research - 1 Sept 2020