Investment Highlights

• We maintain BUY on Tenaga Nasional (TNB) with a lower DCF-based fair value of RM12.60/share (WACC: 7.0%, terminal growth rate: 2.0%) vs. RM13.95/share previously.
   
• We have reduced TNB’s FY21F normalised net profit (including the impact of MFRS16 but excluding forex and impairments) by 10.0% to account for a weaker electricity sales volume growth of 6.0% vs. 9.5% previously. For FY20E, we have assumed that electricity sales volume would fall by 6.0%.
   
• We have assumed a lower electricity demand growth in FY21F due to economic uncertainties arising from Covid19. However, we believe that the impact of the current MCO on electricity demand would not be as severe as FY20E as more industries are allowed to operate. In 1HFY20, TNB’s electricity demand fell by 8.5% YoY. In 2QFY20, TNB’s electricity demand declined by 8.4% QoQ.
   
• On a positive note, reference rates for fuel costs are lower under RP2 (regulatory period) Interim compared with RP2 as energy prices fell in 3QFY20. As fuel costs are surging presently, TNB would be able to pass on the higher fuel costs to users in FY21F under the Imbalance Cost PassThrough mechanism. The reference rates under RP2 Interim are US$67.45/tonne for coal (RP2: US$75/tonne) and RM27.20/mmbtu for gas (RP2: RM35/mmtu).
   
• We estimate that TNB’s depreciation expense would increase by 2.2% to RM10.8bil in FY21F due to the commissioning of the Southern Power Generation (SPG) gas plant. Unit 1 (700MW) of TNB’s 70%-owned Southern Power plant started commercial operations in early January 2021. Unit 2 (700MW) is expected to commence operations in late January 2021.
   
• Malaysia’s energy reserve margin is envisaged to increase to 51% by the end of FY21F from 34% currently. This is mainly due to the commissioning of TNB’s SPG gas power plant and Edra Energy’s 2,242MW gas power plant in FY21F.
   
• We do not expect TNB to carry out another round of fundraising in FY21F. This is spite of the group’s target of having 8,300MW of renewable energy sources by year 2025F (as at November 2020: 3,390MW). We think that TNB would have enough cash reserves to carry out any smallto-medium size acquisition in FY21F. In 3QFY20, TNB issued Islamic MTN of up to RM10bil and Islamic commercial papers of up to RM2bil.

Source: AmInvest Research - 22 Jan 2021