Macquarie Equities Research (MQ Research) wrote a report on Tenaga Nasional Berhad (TNB) following its financial results for 3Q17, which were released last Thursday. TNB generated a profit of RM5,185 mil. for 9M FY17, which was 70% of MQ Research’s annualized estimates for the financial year end 2017 (FY17).

In the report, MQ Research maintains an “Outperform” rating and a target price of RM19.00 for TNB.

Event

• TNB's 9M FY17 headline profits of RM5,185 mil. came in at 70% of MQ Research’s annualised FY17 estimates. While results were tracking in line at the earnings before income tax, depreciation, depletion and amortization (EBITDA) level, a RM150m interest charge for independent power producers (IPP) savings held by it since 2013 and a one-off deferred tax charge led to the lighter-than-expected result. Nonetheless MQ Research maintain an Outperform recommendation on TNB with an unchanged price target of RM19.00.

‌Impact

• TNB incurred a RM150 mil. interest charge for the power purchase agreement (PPA) savings monies which it had collected since 2013. This was on the back of the newly gazetted Federal Government Electricity Supply (Electricity Industry Fund) Order 2017, in April 2017. The gazetting of this order will also see the balance of the PPA savings monies, totaling RM0.5 bil. transferred off TNB's balance sheet to the Electricity Industry Fund, which will be administered by the Energy Commission. This Fund is essentially the stabilisation fund, that MQ Research and the industry had been talking about thus far.

• The RM430 mil. jump in deferred tax was also one-off in nature, and came from the accelerated assetisation of PP&E in 2016/2017. Cash taxes however were lower as a result of increased capital allowances. Management expect effective tax rates to normalise in the low 20%-range post 2018, once it stops recognising reinvestment allowances.

• No details were provided on the rate review for the new regulatory period, except that TNB has narrowed the gap to the regulated asset base average of RM48.5bn as prescribed under the Incentive Based Regulations for 2017.

• Operationally, electricity demand growth slowed to 0.7% in 9MFY17 as the hot weather impact from the el-Nino phenomenon (mid-2016) wore off.

• At the associate level, forex losses at Gama in Turkey, resulted in the overall loss at associate level. The Vortex (UK) acquisition was completed in May and will feature in upcoming results.

‌ Action and Recommendation

• Outperform reiterated. At 11x core price earnings ratio (PER) (ex-reinvestment allowance, TNB continues to trade at a discount to the market and gas utilities. Confirmation of the tariff structure for the new regulatory period (2018-2020) in December should, in MQ Research’s view, provide a key rerating catalyst. Additionally, its 4Q results in October should also provide the market with clearer direction with regard to dividends.

Source: Macquarie Research - 31 Jul 2017