Macquarie Equities Research (MQ Research) maintains its Outperform rating on Tenaga Nasional with an unchanged target price of RM15.20, following its recent review of the Janamanjung 5 plant issues. MQ Research attributes Tenaga’s share price weakness to constant foreign selling as well as environment, social and governance (ESG) concerns, while discussing Tenaga’s split of regulated business as the best solution.

Conclusion

• MQ Research maintains an Outperform recommendation on Tenaga Nasional with an unchanged price-to-earnings ratio (PER) based price target of RM15.20 (15x 21E) following a review of MQ Research’s estimates. While the Incentive Based Regulations (IBR) support regulated earnings, issues with its Janamanjung 5 plant have led MQ Research to trim its generation estimates for 20E. However, Tenaga’s post-20E earnings and free cash flow generation are intact and supportive of MQ Research’s ongoing thesis of increased capital management initiatives ahead. These capital management initiatives, in MQ Research’s view, will be the key rerating catalyst for Tenaga’s shares which have been derated due to foreign ESG focused fund selling. At current levels, the shares at 10x 21E core PER offer an attractive and sustainable 7% dividend yield.

Impact

• ESG selling weighing on valuations. Foreign ownership in Tenaga has fallen to 14.9% at end-Aug 2020 on what MQ Research believes to be a growing base of funds adopting ESG principles. While Tenaga, like other independent power producers (IPPs) in Malaysia bid to build plants whose fuel source are determined by the Energy Commission, the mere exposure to thermal coal has led to these funds having to unwind their positions. The best solution would be for Tenaga to be split into two listed entities – one with the regulated assets and one with the other entities, to allow the ESG focused funds to own the former, which generate RM4bn pa. If the former entity is valued similar to regional transmission and distribution assets, it would be worth RM64bn vs Tenaga’s current market cap of RM60bn. The current internal restructuring has enabled this move, in MQ Research’s view. The key is executing on the split at the listed level.

• Capital management next. With collections now on track (96%), management has stated that it will once again look at the ability to return excess capital to shareholders. By MQ Research’s estimates, Tenaga has excess capital of RM11bn at it regulated business that can be utilised to pay special dividends. MQ Research’s current estimates build in 25sen (RM1.4bn) of special dividends in respect of FY20.

Earnings and Target Price Revision

• Core profits for FY20/21/22 adjusted -4.5/0.0/+0.1% due to lower capacity payments for Janamanjung 5 in 20E. TP unchanged at RM15.20 (15x PER)

Price Catalyst

• 12-month price target: RM15.20 based on a PER methodology.

• Catalyst: Announcement of special dividends during 4Q results (Feb21)

Action and Recommendation

• Outperform maintained. Tenaga remains one of MQ Research’s top picks within Malaysia.

12-month Target Price Methodology

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

Source: Macquarie Research - 9 Oct 2020