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 an undemanding FY21F PE of 12.3x. Also, we forecast TNB’s gross DPS to be 45.0 sen in FY20E (FY19: 100.0 sen), which translates into a yield of 4.1x%.

• Looking ahead, we have assumed that TNB’s electricity sales volume would recover by 9.5% in FY21F after falling by 6.0% in FY20E.

• TNB’s normalised 9MFY20 net profit of RM2.9bil (adjusted for impairments, forex losses, electricity discounts and Covid-19 donation but including MFRS16 impact) was within our forecast but about 15.6% below consensus. TNB recognised electricity discounts of RM125mil in 2QFY20 and RM125mil in 3QFY20.

• TNB’s normalised net profit fell by 31.8% YoY to RM2.9bil in 9MFY20 dragged by a 6.2% fall in electricity sales volume, net impairment on receivables of RM339.0mil and increases in depreciation and interest expense. In addition, TNB’s effective tax rate rose to 28% in 9MFY20 from 18.0% in 9MFY19 due to lower capital allowances resulting from a delay in project completion.

• TNB’s depreciation expense increased by 5.9% YoY to RM7.9bil in 9MFY20 due to the commissioning of the 2000MW Jimah East power plant in late FY19.

• Electricity demand from the industrial sector in Peninsular Malaysia declined by 10.2% YoY in 9MFY20 while demand from the commercial sector shrank by 12.5%. On a positive note, sales volume of electricity to the residential households improved by 9.6% YoY in 9MFY20.

• Comparing 3QFY20 against 2QFY20, electricity sales volume improved by 12.3% as economic activities picked up after the relaxation of the movement control order (MCO) in May 2020. Sales volume of electricity to the industrial customers climbed by 23.4% QoQ in 3QFY20 while demand from the commercial sector increased by 25.7%. However, electricity demand from the domestic sector slid by 11.6% QoQ in 3QFY20.

• TNB recognised an over-recovery of fuel costs of RM1.5bil in 9MFY20 vs. an under-recovery of RM2.0bil in 9MFY19. There was an over-recovery of fuel costs in 9MFY20 as fuel costs had fallen below the reference rates stipulated in the RP2 (Regulatory Period) guidelines. Going forward as gas and coal costs have risen, there may be an under-recovery of fuel costs in 1QFY21.

Source: AmInvest Research - 27 Nov 2020