Investment Highlights

• We maintain BUY on Tenaga Nasional (TNB) with a lower DCF-based fair value of RM12.00/share vs. RM12.10/share previously) (WACC: 7.0%, terminal growth rate: 2.0%).

• We have reduced TNB’s FY22F net profit by 8.7% to account for a higher effective tax rate resulting from the prosperity tax in Malaysia and tax on overseas dividend income. We ascribe a three-star ESG rating to TNB. We have assumed an effective tax rate of 22.0% for TNB vs. 15.0% previously.

• TNB’s normalised net profit of RM3.5bil in 9MFY21 (adjusted for impairments and forex changes but inclusive of MFRS16 impact and allowances for doubtful debts) was within our forecast and consensus estimates. Included in TNB’s reported net profit in 9MFY21 were impairments of RM276.4mil for GMR Energy and RM190.4mil for Liberty Power.

• After a 22.8% QoQ fall in normalised net profit in 2QFY21, TNB’s normalised net profit recovered by 5.9% to RM1.1bil in 3QFY21. This was due to a lower effective tax rate of 15.9% (2QFY21: 30.5%) and a 19.6% fall in general and corporate expenses. Sale of electricity in Peninsular Malaysia slid by 4.4% QoQ in 3QFY21 dragged by a 7.9% fall in demand from the commercial sector.

• Comparing 9MFY21 against 9MFY20, TNB’s normalised net profit rose to RM3.5bil from RM2.4bil. This was driven mainly by strong hydro earnings in 1QFY21 and a 16.7% fall in general expenses.

• Electricity sales volume growth in Peninsular Malaysia was 0.6% YoY in 9MFY21. Sales volume of electricity to the industries rose by 3.0% YoY in 9MFY21 while demand from the residential sector increased by 5.2%. On a negative note, sales volume of electricity to the commercial sector fell by 6.4% YoY in 9MFY21 due to MCO 3.0.

• TNB recognised an under-recovery of fuel costs of RM1,300.8mil in 9MFY21 vs. an over-recovery of RM1,479.2mil in 9MFY20. This was due to increases in gas and coal costs. TNB recognised a larger under-recovery of fuel costs of RM1,313.5mil in 3QFY21 vs. RM314.6mil in 2QFY21. Under RP2 Interim, the reference rates are US$67.45/tonne for coal and RM27.20/mmbtu for gas.

Source: AmInvest Research - 26 Nov 2021