• Tenaga announced a new dividend policy of a 30%-50% earnings payout

• We are positive on the move as historical dividend payout had been in the sub-30% levels

• The development underpins our thesis of rising dividends at Tenaga given an underutilised balance sheet

• Re-affirm BUY at unchanged TP of RM16.80/share.

An updated dividend policy. Tenaga announced a new dividend policy of distributing 30%-50% of earnings as dividends. This is a move away from the previous dividend policy of paying out 40%-60% of Free Cash Flows (defined as Operating Cashflow less normalised capex and interest). We are positive on this news as historically Tenaga had been paying mostly sub-30% earnings payout for dividends (See Exhibit 1). On an earnings payout basis, Tenaga had been paying 25%/27%/25% of EPS as dividends over FY14/15/16.

Assumptions at mid-end of new policy. Our assumption of a 45% earnings payout for FY17F/18F, which implies ~4% dividend yield, is at the mid-end of the new 30%-50% earnings payout dividend policy and compares well to the sub-30% payout in the past 6 years. At the ceiling 50% payout, implied dividend yield could rise to 4.3%-4.5%. In fact, considering recurring capex of just RM6-7b, we think Tenaga has the capacity to pay a lot more dividends than this, notwithstanding possible allocations for M&As or expansion, which we presume would be majority funded by debt as balance sheet is underleveraged at 0.3x net gearing. Dividend yields could rise to 6.4%-6.8% if Tenaga were to payout 100% of FCF.

Recommendation. Management’s move towards the new dividend policy underpins our thesis of rising dividend potential at Tenaga given an underutilised balance sheet. We re-affirm our BUY on Tenaga at unchanged TP of RM16.80. We like Tenaga for: (1) Dividend catalyst on the back of FCF yield of ~7% over FY17F/18F, a relatively under-geared balance sheet at 0.35x and the upcoming capital optimisation exercise (2) Overseas expansion provides scope for stronger growth in the midterm (3) Strong earnings visibility post-ICPT implementation. Capital management and the resolution of its RM2b tax issue with the Inland Revenue Board are key catalysts over the next 12 months. 4% dividend yield looks attractive.

Source: MIDF Research - 13 Dec 2016