Last Saturday, the Prime Minister announced that there will be further rebates on electricity bills worth RM942m. Malaysia’s electric utility company Tenaga Nasional (Tenaga) issued an FAQ stating that their contributions towards this added rebate amounts to RM100m, bringing their overall contributions to RM250m. Macquarie Equities Research (MQ Research) released a report yesterday (22 Jun) providing its view on the latest development, and maintains Outperform on Tenaga.

Event

• The Prime Minister announced on Saturday that electricity users will be given further rebates on their electricity bills worth RM942m. Tenaga has issued an FAQ which points to their contribution towards this added rebate being worth RM100m, bringing their total contributions to the Covid-related discounts / rebates to RM250m. While the added RM100m contributions will hit core profits by a further 2%, the added contribution from the Kumpulan Wang Industri Elektrik (KWIE) fund (RM842m) reduces credit risks further. MQ Research maintains its Outperform recommendation on Tenaga whose shares continue to trade at what MQ Research sees as an attractive 13x core 20E price-earnings ratio (PER), and offers an attractive dividend yield of 6%.

Impact

• Net impact on Tenaga 4%. The cost of this new package together with the previously announced (Mar 2020) discounts will hit Tenaga’s pre-tax earnings by RM250m, as the discounts are captured as part of corporate social responsibility (CSR) activities which are tax deductible. The net impact of total discounts provided is 4% of core profits. Tenaga also contributed RM28m to other CSR activities related to Covid.
• Credit risk mitigated. With the KWIE Fund funding RM1.2bn of the total RM1.5bn in discounts/rebates announced, the impact of potential defaults has been mitigated in MQ Research’s view.
• Potential deferment of Third Regulatory Period (RP3) could mitigate impact. As discussed at Tenaga’s 1Q20 results briefing, Tenaga has proposed that the implementation of RP3 be deferred by one year. On the assumption that the regulated returns under RP3 were to be reduced by 0.2ppt to 7.1%, core profits in 21E would be lifted by ~RM110m based on the end 20E Regulated Asset Base (RM54.8bn).
• Added rebates for the consumer. Under the new package, 7.66m residential consumers will receive discounts on their consumption between April-June 2020. For those consuming <300kWh, ie 52% of customers, they will be provided free electricity for the period. For those consuming more, they will see discounts of at least RM77/month or RM231 on top of the discounts previously announced.
• ICPT announcement soon. The Indirect Cost Pass Through announcement for electricity prices is due by end of June. With fuel prices on a downward trend, MQ Research would expect the current 2sen/kWh surcharge to be reduced further. MQ Research would not rule out the possibility of some of the cost reductions being used to rebuild the KWIE fund, which has seen inflows of late due to the fall in fuel prices.

Action and Recommendation

• Outperform reiterated.

12-month Target Price Methodology

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

Source: Macquarie Research - 23 Jun 2020