The senior management of Tenaga Nasional (Tenaga) confirmed at a meeting with Macquarie Equities Research (MQ Research) that the regulatory glide path hasn’t changed. MQ Research says that Tenaga’s core earnings are likely to remain intact, and maintains its Outperform recommendation with a target price of...

Event

• MQ Research reiterate its Outperform rating on Tenaga following a meeting with senior management and a group of local investors. The Malaysian Energy, Science, Technology, Environment and Climate Change Ministry’s study on allowing more players into the energy market is part of the already announced Malaysia Electricity Supply Industry (MESI) 2.0 restructuring and does not change the existing regulatory glide path.
• As MQ Research has discussed in its recent report, the ultimate liberalisation of the energy market will take time, and with the core transmission and distribution (T&D) component unlikely to see competition, Tenaga’s core earnings are likely to remain intact. The increased regulatory certainty should also pave the way for increased capital management over time. Against this backdrop MQ Research sees Tenaga’s core 20E price-earnings ratio (PER) of 13x and 4% dividend yield as attractive.

Impact

• Many steps to full liberalisation. Management confirmed MQ Research’s views that full industry liberalisation as proposed by the minister will take time. In the interim, new players may be allowed to participate in the consumer services segment to provide consumers with a choice, but its attractiveness will be limited. Tweaking the Consumer Service returns (20E RM23m) in regulatory period 3 (RP3) would be one option to attract new players. MQ Research sees the reduction of the regulated return for the T&D assets from 7.3% to an estimated 7.1% as providing an opportunity for this, while still providing Tenaga with RM4bn pa in profits with a 2% compounded annual growth rate (CAGR).
• Jimah East delays not significant. Management confirmed that there was an issue with the turbine in the first unit of the Jimah East power plant, which could delay the plant’s commercial operation date by a few weeks. Costs related to this issue and potential delays are covered by the insurance policies and agreements in place with the engineering, procurement and construction (EPC) contractor.
• Dividend upside over time. Management maintained their 50-60% dividend payout ratio guidance, but did agree that over time there would be opportunities to increase capital management activities. However it is increasingly apparent to us that any significant moves can only come once the ring fenced entity separation neutralizes.

Earnings and Target Price Revision

• No change.

Price Catalyst

• 12-month price target: RM15.80 based on a PER methodology.

• Catalyst: Announcement of MESI 2.0 plans in 2H19

Action and Recommendation

• Outperform reiterated.

12-month Target Price Methodology

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

Source: Macquarie Research - 10 Jul 2019