Investment Highlights

• We affirm BUY on Tenaga Nasional (TNB) with an unchanged DCF-based fair value of RM12.00/share (WACC: 7.0%, terminal growth rate: 2.0%), with a neutral 3-star ESG rating to TNB.

• TNB’s 1QFY22 normalised net profit of RM867.8mil (adjusted for impairments and forex changes but inclusive of MFRS16 impact) was within our forecast and consensus estimates. We expect TNB’s net profit to improve in the coming quarters on the back of a lower effective tax rate.

• The group’s normalised net profit declined by 39.7% YoY to RM867.8mil in 1QFY22 due to higher depreciation and increased taxation expense. TNB’s depreciation rose by 4.6% YoY to RM2.8bil as the Edra Melaka power plant commenced operations.

• TNB’s effective tax rate climbed to 44.2% in 1QFY22 from 34.6% in 1QFY21 due to prosperity tax and deferred taxes. TNB’s recognition of prosperity tax amounted to RM113.9mil in 1QFY22.

• TNB recorded an electricity sales volume growth of 4% YoY in Peninsular Malaysia in 1QFY22. Although sales volume to the industrial sector edged down by 0.2% YoY in 1QFY22, the commercial sector consumed 10.2% more electricity as hotels, shopping malls and educational facilities resumed operations. Sales volume of electricity to the residential sector grew by 3.3% YoY in 1QFY22.

• TNB recognised an under-recovery of fuel costs of RM3.5bil in 1QFY22 compared to an over-recovery of costs of RM327.3mil in 1QFY21. There was an under-recovery of fuel costs in 1QFY22 as coal and gas costs had surged. Under RP3, the reference rates are US$79/tonne for coal and RM26/mmbtu for LNG.

• We believe that the higher costs of fuel would be passed on to consumers in form of a tariff surcharge in 2HFY22. The tariff surcharge for industrial and commercial users was 3.7sen/kWh in 1HFY22.

Source: AmInvest Research - 31 May 2022