Investment Highlights

• We affirm BUY on Tenaga Nasional (TNB) with a higher DCF-based fair value of RM12.10/share vs. RM12.00/share previously (WACC: 7.0%, terminal growth rate: 2.0%). We ascribe a three-star ESG rating to TNB.

• On an annualised basis, TNB’s normalised net profit of RM2.4bil in 1HFY21 (adjusted for impairments and forex losses but including MFRS16 impact and allowance for doubtful debts) was 11.2% above our forecast but within consensus estimates. We have raised TNB’s normalised net profit by 7.9% to account for lower-than-expected repair and maintenance expenses.

• Included in TNB’s 1HFY21 reported net profit was an impairment of RM276.4mil for GMR Energy and an impairment on Liberty Power’s receivables of RM179.4mil.

• After a sterling 1QFY21, which was boosted by strong hydro earnings and lower repairs and maintenance expenses, TNB’s normalised net profit fell by 22.8% QoQ to RM1,043.7mil. The QoQ decline in normalised net profit in 2QFY21 was due to allowances for doubtful debts of RM342.8mil (1QFY21: RM121.5mil) and higher general and corporate expenses.

• Comparing 1HFY21 against 1HFY20, TNB’s normalised net profit rose 26.6% to RM2.4bil on higher sales of electricity and stronger hydro earnings. The hydro unit benefited from a high level of water due to the monsoon season.

• TNB’s electricity sales volume growth in Peninsular Malaysia was 4.4% YoY in 1HFY21 (FY20: -5.0%). Sales volume of electricity to the industries (steel, cement, electronics and electrical industries) climbed by 11.2% YoY in 1HFY21.

• However, demand for electricity from the commercial sector (hotels, transportation and educational institutions) edged down by 1.0% YoY in 1HFY21 as most of the facilities were not allowed to operate during MCO 3.0. Sales volume of electricity to the residential households rose by 2.0% YoY in 1HFY21.

• TNB recognised a smaller over-recovery of fuel costs of RM12.7mil in 1HFY21 vs. RM522.4mil in 1HFY20 as fuel costs have gone up.

• Comparing 2QFY21 against 1QFY21, there was an underrecovery of costs of RM314.6mil vs. an over-recovery of costs of RM327.3mil as coal costs have risen. Under RP2 Interim, the reference rates are US$67.45/tonne for coal and RM27.20/mmbtu for gas.

Source: AmInvest Research - 27 Aug 2021