Investment Highlights

• We maintain BUY on Tenaga Nasional (TNB) with a lower DCF-based fair value of RM11.40/share vs. RM11.50/share previously (WACC: 7%, terminal growth rate: 2%). We ascribe a neutral 3-star ESG rating to TNB.

• In spite of TNB’s weak 3QFY23 results, we are keeping our recommendation as the group’s earnings are expected to recover in 4QFY23. We believe that TNB’s fuel margin will turn positive in 4QFY23 as the group has drawn down most of its high-cost coal inventory in 3QFY23.

• TNB’s normalised 9MFY23 net profit of RM2.4bil (excluding unrealised forex changes and impairments but inclusive of MFRS16) was 14% below our forecast and consensus. TNB under-performed as GenCo’s losses widened in 3QFY23. We have reduced TNB’s FY23E net profit by 14% to account for this.

• TNB’s normalised net profit shrank by 18% YoY to RM2.4bil in 9MFY23 as fuel margin swung into the red and there was a step down in the capacity rate factor of a few power plants.

• GenCo recorded a net loss of RM327.9mil in 9MFY23 compared to a net profit of RM1.1bil in 9MFY22. Fuel margin loss was RM767.9mil in 9MFY23. Comparing 3QFY23 against 2QFY23, GenCo’s net losses widened to RM134.1mil from RM116.7mil.

• Sales volume of electricity in Peninsular Malaysia rose by 2.5% YoY in 9MFY23, driven by the commercial and residential sectors. Electricity demand from the commercial sector improved by 6.7% while the residential sector consumed 5.2% more electricity. On a negative note, electricity demand from the industrial sector fell by 3.1% YoY in 9MFY23.

• TNB’s receivables continued to decline to RM13.4bil as at end-September vs. RM14.5bil as at end-June.

• TNB recorded a smaller under-recovery of fuel costs of RM8.5bil in 9MFY23 compared to RM15.9bil in 9MFY22. The fall in under-recovery of fuel costs can be attributed to the decline in gas and coal prices. Recall that under RP3, the reference rates are US$79/tonne for coal and RM26/mmbtu for gas.

• TNB is currently trading at a 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 - 27 Nov 2023