Investment Highlights

• We maintain BUY on Tenaga Nasional (TNB) with an unchanged DCF-based fair value of RM12.00/share (terminal growth rate: 2.0%, WACC: 7.0%). We ascribe a three-star ESG rating to TNB.

• We forecast electricity demand for Peninsular Malaysia to improve by 3.0% in FY21F (1QFY21: -0.3% YoY) in contrast to a fall of 5.0% in FY20. We believe that the impact of MCO 3.0 would not be as severe as last year’s MCO 1.0 as many industries are still allowed to operate, albeit with a smaller workforce.

• On a negative note, we reckon that electricity demand from the commercial sector would be weak in FY21F as shopping malls, hotels and educational facilities are still operating below capacity or not operating at all.

• Industries accounted for 40% of TNB’s sales volume in 1QFY21 while commercial accounted for another 27%. Residential households made up an additional 31% of TNB’s sales volume while others (agriculture, mining and public lighting) accounted for the balance 2%.

• RP3 (Regulatory Period 3) negotiations for the period of 2022F to 2024F are currently ongoing. We believe that the important parameters are the required rate of return and capex allocations granted to TNB. Although the rate of return may decline under RP3 as the cost of debt has fallen, we believe that it cannot be too low as there would not be any incentive for TNB to invest in capex. Presently, the rate of return under RP2 Interim is 7.3%.

• In spite of TNB’s initiatives to expand its renewable asset portfolio, we reckon that these will take time. Renewable power plants (mainly hydro and solar) accounted for 7.5% of TNB’s generation mix in 1QFY21. TNB’s target is to own 8,300MW of renewable energy assets in FY25F vs. 3,402MW as at March 2021. As at end-December 2020, TNB’s effective generating capacity stood at 13,857MW.

• Incidentally, TNB’s foreign shareholding has been falling. TNB’s foreign shareholding stood at 12.4% as at end March 2021 compared with 16.9% as at end-March 2020. At the peak in August 2016, TNB’s foreign shareholding stood at 28.3%.

• On a positive note, we believe that TNB’s dividend payments would still be decent. We forecast TNB’s gross DPS to be 80.0 sen in FY21F (FY20: 80 sen), which translates into a yield of more than 7.0%.

Source: AmInvest Research - 21 Jun 2021