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.

• We attended TNB’s analyst briefing yesterday. Here are the key takeaways:-

• TNB is confident that the government will approve the tariff surcharge for 1HFY23 in accordance with the costpass through mechanism.

• The ICPT (Imbalance Cost Pass Through) charges are estimated to be RM16.4bil for 1HFY23. There is a tariff surcharge in 1HFY23 as coal and gas costs have exceeded the reference rates of US$79/tonne and RM26/mmbtu stipulated under RP3. The ICPT mechanism has always been honoured in the past.

• TNB reckons that it will not be significantly affected by targeted subsidies, if the scheme is implemented by the government.

• Also, TNB would be prepared to face competition from other players if the retail segment is liberalised. We believe that TNB would have a competitive advantage due its extensive database, cost efficiencies and existing infrastructure.

• TNB would continue paying out 30% to 60% of its normalised net profit as dividends. Based on a payout of 50%, we forecast a gross DPS of 38 sen for TNB in FY22E. This implies a yield of 4%. For FY23F, we estimate a gross DPS of 45 sen, which translates into a yield of 5%.

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

Source: AmInvest Research - 9 Dec 2022