Investment Highlights

• We maintain BUY on Tenaga Nasional (TNB) with a lower DCF-based fair value of RM11.50/share vs. RM11.80/share (WACC: 7%, terminal growth rate: 2%). We ascribe an unchanged 3-star ESG rating to TNB.

• On an annualised basis, TNB’s normalised 1HFY23 net profit (excluding unrealised forex changes and impairments but inclusive of MFRS16) was 12% below our forecast and 15% short of consensus estimates. TNB’s results were weak due to losses at GenCo and a 33% increase in repairs and maintenance expenses. We have reduced TNB’s FY23E net profit by 12% to account for these.

• Going forward, we believe that GenCo’s fuel margin will stabilise as coal prices have plateaued since 2QFY23. Hence, GenCo’s results are expected to improve in 2HFY23.

• GenCo recorded a bigger net loss of RM116.7mil in 2QFY23 vs. RM77.1mil in 1QFY23 as fuel margin remained negative. Fuel margin was a negative RM565.7mil in 1HFY23. In addition, there was a step down in the CRF (capacity rate factor) of a few power plants from 3QFY22 onwards. Comparing 1HFY23 against 1HFY22, GenCo swung to a net loss of RM193.8mil from a net profit of RM806.6mil.

• Repairs and maintenance expenses climbed by 33% YoY to RM1.3bil in 1HFY23 as operational activities picked up after being affected by a high number of Covid cases last year.

• Sales volume of electricity in Peninsular Malaysia inched up by 1.9% YoY in 1HFY23 as stronger demand from the commercial and residential sectors compensated for weaker demand from the industrial sector. Electricity demand from the commercial sector climbed by 6.7% YoY in 1HFY23 while residential sector consumed 4.3% more electricity due to the hot weather. On the flip side, electricity demand from the industrial sector dipped by 3.8% YoY in 1HFY23 as export activities slowed.

• TNB’s receivables eased in 2QFY23. Receivables stood at RM14.5bil as at end-June vs. RM19.7bil as at end-March.

• TNB recorded a smaller under-recovery of fuel costs of RM6.5bil in 1HFY23 vs. RM9.8bil in 1HFY22. Although coal and gas costs have fallen, they are still above the reference rates stipulated in the RP3 guidelines. Under RP3, the reference rates are US$79/tonne for coal and RM26/mmbtu for gas.

• TNB is currently trading at an attractive FY24F PE of 13x, which is lower than the 2-year average of 15x. Dividend yield is also decent at 4.5% for FY24F.

Source: AmInvest Research - 28 Aug 2023