Investment Highlights

• In spite of Tenaga Nasional’s (TNB) share price underperformance, we maintain BUY with an unchanged DCF-based fair value of RM13.95/share (terminal growth rate: 2%, WACC: 7.0%). TNB is currently trading at an undemanding FY21F PE of 11.6x. We believe that TNB is a proxy to Malaysia’s economic recovery in FY21F.

• We attribute TNB’s recent share price underperformance to uncertainties over some of the parameters in the RP2 interim guidelines for FY21F, weak earnings in 1HFY20 and foreign selling. Recall that early this year, Black Rock said that it would be exiting coal mining investments. Discussions on RP2 Interim are expected to be concluded at the end of FY20E.

• TNB’s foreign shareholding stood at 14.9% as at endAugust 2020 vs. 18.4% as at end-December 2019. The lowest level of foreign shareholding in the past 10 years was 10.5% in year 2010.

• On a positive note, we have raised TNB’s FY20E gross DPS to 45 sen from 35 sen (FY19: 100 sen). Our gross DPS forecast of 45 sen implies a net payout of 65% based on our normalised net profit forecast of RM3.9bil. Our FY20E gross DPS of 45 sen translates to a decent dividend yield of 4.3%.

• We reckon that TNB’s net earnings would improve in 2HFY20. This is expected to be underpinned by a recovery in electricity sales volume and lower effective tax rate. Partly offsetting these improvements are provisions for doubtful debts and loss of capacity payments at the Manjung 5 power plant.

• We think that TNB’s electricity sales volume in Peninsular Malaysia would rise by 8% to 15% QoQ in 3QFY20 after falling by 8.4% QoQ in 2QFY20. For the full year, we have assumed that TNB’s electricity sales volume would decline by 6.0% (1HFY20: -8.5% YoY). The recovery in electricity sales volume in 2HFY20 is expected to be supported by increased economic activities in the industrial and commercial sectors.

• On a negative note, we reckon that TNB would still be recording provisions for doubtful debts in 2HFY20. The group’s provisions for doubtful debts amounted to RM140mil (2.6% of trade debtors of RM5.4bil) in 1HFY20. The provisions for doubtful debts are expected to be mainly in respect of customers in the commercial sector.

• Also, Manjung 5 is expected to operate at only 70% of its capacity due to operational issues. The power plant would be fully operational only by February 2021. Loss of capacity payments were about RM48.3mil in 2QFY20.

Source: AmInvest Research - 12 Oct 2020