Yesterday, Tenaga Nasional Berhad (Tenaga) announced financial result for its first quarter ended March 31, 2019 (1Q19). In the research report released yesterday (28 May), Macquarie Equities Research (MQ Research) stated that Tenaga’s 1Q19 earnings of RM1.6bil. represented 27% of MQ Research’s estimates. Also, MQ Research maintained Outperform on Tenaga with a target price of RM15.80 as they are optimistic on the new CEO’s efforts to improve the execution capabilities of the group which include its overseas ventures.

Conclusion

• MQ Research reiterates its Outperform recommendation on Tenaga post the analyst meeting hosted by management following the release of 1Q19 results. Core underlying earnings of RM1.6bn represented 27% of MQ Research and 29% of consensus estimates. New CEO, Amir Hamzah’s, goal to improve execution capabilities at Tenaga should be accretive to shareholders over time. In the meantime MQ Research believes the market has once again priced in unduly high regulatory risk premiums on Tenaga’s shares, which trade at an undemanding 11x core 19E price-to-earnings ratio (PER). 

Impact

• Results inline. While further impairments for associates, Gama Enerji (Gama) and GMR Energy (GMR), totaling RM334m were negative, these were mitigated by a write back of long-term incentive provisions in respect of 2018 (RM221m) and one-off provisions in respect of Regulatory Period 1 (RP1) (RM180m). The implementation of Financial Reporting Standard 16 (FRS16) had a negative RM23m impact on profits with management keeping to its full year guidance of c.RM300m negative impact given timing related issues in 1Q19. On a pre-Malaysian Financial Reporting Standard 16 (MFRS16) basis, which MQ Research’s estimates are based on, Tenaga delivered 27% of MQ Research’s FY19 core profit estimate of RM5.95bn.

• New CEO focused on improving execution capabilities. New CEO, Amir Hamzah, felt that Tenaga had the right building blocks in place, and his key focus was to improve execution capabilities. One area he felt Tenaga could do better was its overseas ventures. While macro events did impact the results of Gama and GMR, he felt that they were good assets and it was up to Tenaga to improve its methods in assessing future investments. He felt that for now Tenaga needed to work out turnaround plans for these assets before building on the existing assets.

• Regulatory regime intact and unlikely to shift near-term earnings. Management reaffirmed that the principles of the IBR (Incentive-Based Regulations) are intact, and while the opening up of the retail segment was on the cards, its impact on profitability was unlikely to be significant. Based on the figure released by the Energy Commission, the retail segment (Consumer Services) contributes an average RM20m pa to Tenaga in Regulatory Period 2 (RP2). Management also pointed out that the size of the Malaysian grid is too small to break up the Transmission and Distribution (T&D) businesses. Additionally as MQ Research pointed out before, for more widespread competition to take place, would require access generation capacity, which is not on Power Purchase Agreements (PPA). Based on the current lifecycle of PPA, MQ Research estimate 5.6GWh of capacity coming off PPAs between 2019 and 2025, with the bulk of these occurring post 2022. With coal prices easing in 1Q19, management felt that there was unlikely to be an increase in tariff surcharges. An official announcement is due soon.

• Impairments done? The impairments taken in respect of GMR and Gama have now fully accounted for financial guarantees in respect of Gama, and written down GMR to 40% of its investment value. Tenaga is still assessing the capital needs of Gama.

Action and Recommendation

• Outperform reiterated.

12-month Target Price Methodology

• TNB MK: RM15.80 based on a discounted cash flow (DCF) methodology

Source: Macquarie Research - 29 May 2019