With 89% of the recently announced discounts to residential customers of RM942m coming from the KWIE and the government, Macquarie Equities Research (MQ Research) is of the view that Malaysia’s electric utility company Tenaga Nasional (Tenaga) has seen reduced risks on collections. MQ Research maintains Outperform on Tenaga with a target price of RM15.20, 30.8% above yesterday’s closing price of RM11.62.

Event

• MQ Research reiterates its Outperform recommendation on Marquee Idea stock, Tenaga, with an unchanged price-earnings ratio (PER) derived (15x) price target of RM15.20, following the latest Imbalance Cost Pass-Through (ICPT) announcement. In keeping with the Incentive Based Regulation (IBR), Tenaga has come in neutral from the 2sen/kWh reduction in the surcharge for 2H20 on lower fuel costs. The recently announced RM942m in added discounts to consumers are prima facie negative to earnings, but with 89% of the discount coming from the Kumpulan Wang Industri Elektrik (KWIE) Fund and government contributions the earnings impact is marginal when one accounts for the reduced credit costs. Against this backdrop MQ Research maintains its view that efforts to right size Tenaga’s balance sheet will see further room for capital management and support a rerating of its shares which trade at an undemanding 13x 20E core PER.

Impact

• IBR preserved. With fuel costs down in 1H20, the tariff for 2H20 has been reduced by 2.0sen/kWh. It is likely that this adjustment has also factored in some rebuilding of the KWIE fund which MQ Research believes was largely depleted by end 2019. Rebuilding the fund should aid future efforts to protect consumers impacted by the Covid pandemic if need be.
• Discounts reduce credit risks. With RM842m of the recently announced discounts to residential users of RM942m coming from the KWIE and the government, the risks on collections have been reduced somewhat in MQ Research’s view.
• 17% of market cap in debt headroom. Assuming the FY19 special dividend of RM2.8bn came entirely out of the regulated business, MQ Research estimates that this business would still have debt headroom of RM11.3bn. MQ Research believes this is one logical source for the government to fund its enlarged budget deficit (est 6.1%). MQ Research assumes 20sen/sh (RM1bn) in specials for 20E.
• Plants coming back. MQ Research understands from management that the Janamanjung 5 plant which faced an unplanned outage since early May, will be back online in early July. MQ Research has penned in RM200m in reduced capacity payments into its estimates as a result.

Earnings and Target Price Revision

• MQ Research is lowering 20E core profit estimates by 5.5% on Janamanjug 5 outage and delayed COD of Southern Power. Target price stays at RM15.20 (15x 21E PER)

Price Catalyst

• 12-month price target: RM15.20 based on a PER methodology.
• Catalyst: Capital management initiatives as early as 2Q20 results

Action and Recommendation

• Outperform maintained.

12-month Target Price Methodology

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

Source: Macquarie Research - 1 Jul 2020