Investment Highlights

• We maintain BUY on Tenaga Nasional (TNB) with an unchanged DCF-based fair value of RM11.80/share (WACC: 7%, terminal growth rate: 2%). We ascribe a 3-star ESG rating to TNB.

• TNB’s annualised normalised 1HFY22 net profit (adjusted for impairments and forex but inclusive of MFRS16 impact) was within our forecast and consensus estimates.

• TNB has declared a lower gross DPS of 20 sen in 1HFY22 compared to 22 sen in 1HFY21. We reduce our gross DPS for TNB to 38 sen from 40 sen. This implies a yield of 4.2%.

• TNB’s 1HFY22 normalised net profit fell by 16% YoY to RM2bil, dragged by a higher effective tax rate and increase in depreciation expense.

• TNB’s effective tax rate increased to 42% in 1HFY22 from 33% in 1HFY21 due to the prosperity tax and deferred tax expense. TNB recognised prosperity tax of RM257mil and deferred tax expense of RM283mil in 1HFY22.

• Depreciation expense increased by 6% YoY to RM5.6bil in 1HFY22 due the commissioning of the Edra Melaka power plant in February.

• Sales volume of electricity in Peninsular Malaysia grew by 5.7% YoY in 1HFY22. The increase in demand was driven by the commercial sector, which used 13.9% YoY more electricity in 1HFY22. Recall that most of the companies in the commercial sector did not operate during the Covid-19 lockdown in 1HFY21.

• Sales volume of electricity to the residential sector inched up by 1.4% YoY in 1HFY22 while the industrial sector’s consumption of electricity improved by 2.7%.

• TNB recorded an under-recovery of fuel costs of RM9.8bil in 1HFY22 compared to an over-recovery of RM12.7mil in 1HFY21. There was an under-recovery of fuel costs in 1HFY22 as coal and gas costs increased. Under RP3, the reference rates are US$79/tonne for coal and RM26/mmbtu for LNG.

• TNB’s receivables increased to RM19bil as at 30 June from RM14bil as at 31 Mar. Out of the RM19bil, about RM12bil or 63% were ICPT payments while the balance comprised mainly trade debtors.

• In spite of this, we continue to like TNB for its protected rate of return of 7.3%. Also, TNB’s FY23F PE is undemanding at 10x, which is below its 5-year average of 16x.

Source: AmInvest Research - 1 Sept 2022