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 normalised net profit of RM3.4bil in 9MFY22 (excluding unrealised forex changes and impairments but inclusive of MFRS16 impact) was within our forecast and consensus estimates.

• TNB’s normalised net profit inched down by 2% YoY to RM3.4bil in 9MFY22 due to higher effective tax rate and increase in depreciation expense.

• TNB’s effective tax rate climbed to 40% in 9MFY22 from 28% in 9MFY21 as the group recognised prosperity tax and higher deferred tax expenses. Depreciation expense increased by 7% YoY to RM8.4bil in 9MFY22 as the Edra Melaka power plant was commissioned in February.

• Sales volume of electricity in Peninsular Malaysia improved by 8% YoY in 9MFY22. Demand from the industrial sector rose by 5.8% YoY in 9MFY22 while the commercial sector used 19.2% more electricity. Recall that the commercial sector was affected by Covid-19 lockdowns in 9MFY21. Sales volume of electricity to the residential segment was flat.

• TNB’s receivables increased to RM22bil as of end September from RM19bil as at end-June. Going forward, we believe that TNB’s receivables would decline as the group received payments of more than RM2bil from the Malaysian government in October and November.

• TNB recorded a larger under-recovery of fuel costs of RM15.9bil in 9MFY22 compared with RM1.3bil in 9MFY21. The increase in the under-recovery of fuel costs came about as coal and gas costs continued to exceed the reference rates stipulated in RP3.

• TNB is currently trading at a FY23F PE of 10x, which is lower than the 2-year average of 15x.

Source: AmInvest Research - 24 Nov 2022