Last week, Tenaga Nasional (“Tenaga”) proposed an internal reorganisation, which involves the transfer of Tenaga’s domestic power generation and electricity retail businesses to two new wholly-owned subsidiaries. With this, Macquarie Equities Research (MQ Research) maintained its Outperform rating on the company with a 12-month target price of RM15.80. Read on to find out why.

Event

• MQ Research reiterates its Outperform recommendation on Tenaga following a review of regional comps and its implications for Tenaga’s proposed internal reorganisation. Assuming the regulated transmission and distribution (T&D) assets are valued in line with regional peers at 19.2x, the remaining non-regulated assets are essentially being valued at 1x vs generations assets in the region at 13x.
• The proposed internal reorganisation plan, meanwhile, provides greater opportunity to realise cost efficiencies to further drive earnings and valuations, which at 13x core 20E price-to-earnings ratio (PER) remain below the market’s 15x and Malaysian gas utilities at 19-20x. Tenaga’s 4% dividend yield, meanwhile, becomes increasingly attractive in a falling rate environment.

Impact

• Internal reorganisation for lower costs. The proposed internal reorganisation which was announced on 29 July will streamline the management of Tenaga’s businesses and allow for better cost management, in MQ Research’s view. While savings in the regulated businesses will be shared with consumers based on a predetermined formula, savings in non-regulated businesses will accrue to shareholders. Every 5% lift in non-regulated earnings would add 1.5% to overall group profits.

• MESI 2.0 to help drive regulated premium. MQ Research sees the upcoming Malaysian Energy Supply Industry (MESI) 2.0 framework announcement (expected in 3Q19) confirming that the T&D businesses will remain natural monopolies which will enjoy a prescribed return under the Incentive Based Regulations. This should at the very least allow for a rerating of Tenaga’s regulated assets, which contribute two-thirds of Tenaga’s core profits. Based on the weighted average 20E PER of 19.2x for regional T&D assets in electricity and gas, Tenaga’s regulated assets are worth RM77bn, or 98% of its current market cap.

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 framework in 3Q19.

Action and recommendation Outperform reiterated.

12-month Target Price Methodology

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

Source: Macquarie Research - 9 Aug 2019