To address concerns around Tenaga Nasional’s (Tenaga) regulatory environment, namely the Malaysian Energy Supply Industry (MESI) 2.0 reforms, Macquarie Equities Research (MQ Research) hosted a conference call for investors with Tenaga senior management. MQ Research reiterates its Outperform rating on Tenaga with a target price of RM15.80.

Conclusion

• MQ Research reiterates its Outperform recommendation on Tenaga following a conference call it hosted for investors with Tenaga’s senior management, to address recent shareholder concerns around the regulatory environment. In summary, it does not appear that MESI 2.0 reforms will significantly change the returns of Tenaga as perceived by the market. MQ Research sees current valuations at 11x 20E Core price to earnings ratio (PER) and a 5% dividend yield as attractive.

Impact

• Shareholder value protected by MESI 2.0. While details of MESI 2.0 are only expected to be announced in mid-2019, parties working on it have amongst its five pillars the need to sustain returns to stakeholders who ultimately will fund the sector. Against this backdrop, significant changes in returns to shareholders should not be expected. For Tenaga, the move from Regulatory Period 1 (RP1) to RP2 saw a 0.2ppt reduction in its Regulated Returns from 7.5% to 7.3%, and for PR3 which takes effect in 2021, there is no reason to expect a significant shift in this glide path. It was also unlikely that the principles of the IBR/ICPT would be broken in light of buoyant fuel prices.
• Retail competition risks overblown? Management felt that while the regulatory framework under RP2 allowed for retail competition, the lack of excess generation capacity, ie plants not on PPAs, coupled with the low returns, may limit its attractiveness for some time yet.
• MFRS16 impact. Management confirmed that MFRS16 will negatively impact Tenaga’s FY19 earnings by c.RM300m as articulated during the 4Q results briefing. There will be no cashflow impact. MQ Research’s estimates have not accounted for MRFS16.
• Broadband won’t change capex profile. Management confirmed that should Tenaga venture into the broadband space, the plan would be to stay a wholesale player. All plans currently are based on rollouts in areas without existing infrastructure. And, most importantly, the plans must make commercial sense.

Earning and Target Price Revision

• No change.

Price Catalyst

• 12-month price target: RM15.80 based on a PER methodology.
• Catalyst: Tariff announcement in May 2019.

Action and Recommendation

• Outperform reiterated.

12-month Target Price Methodology

• TNB MK: RM15.80 based on a PER methodology

Source: Macquarie Research - 2 May 2019