In a research report dated today (9 Apr), Macquarie Equities Research (MQ Research) maintained Tenaga as its top pick with an Outperform rating, albeit the target price is revised lower to RM15.20 (prev RM15.80). MQ Research expects Tenaga’s FY20E profit to improve with the restarting of Kapar 6 and Janamanjung 2 plants which experienced unplanned outages in 2019, along with potential higher dividends supported by the government’s RM35bn fiscal injection.

Event

• MQ Research reiterates an Outperform recommendation on Macquarie Marquee Idea stock, Tenaga Nasional, with an adjusted price-to-earnings ratio (PER) derived target price of RM15.20 (from RM15.80) following a review of MQ Research’s estimates. The ongoing COVID-19 pandemic and subsequent mandatory control order (MCO) is likely to have a negative impact on electricity demand growth (MQ 20E -3%). However, the regulatory framework should keep Tenaga largely shielded. The restarting of two of Tenaga’s plants after forced outages in 2019 and the entry of new generation units, should instead lift 20E core profit +12% YoY. The government’s RM35bn care package should soften the blow from the COVID-19 pandemic meanwhile it raises the likelihood of further capital management initiatives, in MQ Research’s view. Against this backdrop, MQ Research sees value in Tenaga’s 13x core 20E PER with 6% dividend yield support.

Impact

• Demand likely to suffer but IBR and new plants help. MQ Research forecasts a 12% increase in Tenaga’s core profit in 20E. The Incentive-based Regulations (IBR) by which Tenaga’s regulated profits (~RM4bn pa) are governed will limit the impact from reduced electricity demand growth in 20E. Meanwhile the two plants, Kapar unit 6 and Janamanjung 2, which experienced unplanned outages for most of 2H19, are now back online, providing a boost to generation earnings. Additionally 20E will mark the first full year of contributions from the 2,000MW Jimah East plant, while the 1,440MW Southern Power plants comes on stream in July, adding to generation profits. On the negatives, bad debt provisioning is set to rise, in MQ Research’s view.

• Capital management upside. Having returned RM2.8bn in cash to shareholders via a special dividend in 2019, MQ Research has penned in a further RM1bn in special dividends for 20E. Based on its 2018 company accounts that MQ Research estimates, that the regulated business can still release up to RM10.7bn or RM1.87/sh in cash before hitting its 55:45 debt equity ratio as contained in its regulated return calculations. The government’s RM35bn fiscal injection for the COVID-19 pandemic gives an added catalyst to raise its payout.

Earnings and Target Price Revision

• FY20/21 core profit estimates reduced 12.9/4.8% to reflect plant outages and COVID-19 impact. Target price reduced to RM15.20 (15x 21E core PER).

Price Catalyst

• 12-month price target: RM15.20 based on a PER methodology.
• Catalyst: Rebound in earnings from plant start-ups. Special dividends.

Action and Recommendation

• Outperform reiterated. Tenaga remains a top pick for Malaysia.

12-month Target Price Methodology

• TNB MK: RM15.20 based on a PER methodology

Source: Macquarie Research - 9 Apr 2020