This article first appeared in The Edge Financial Daily on March 2, 2018

Tenaga Nasional Bhd
(March 1, RM15.70)
Maintain hold with an unchanged target price (TP) of RM16.70: Tenaga Nasional Bhd’s (TNB) core net profit (CNP) for the cumulative 16 months of financial year 2017 (FY17) ended Dec 31, 2017 was within expectations, at 100% of our FY17 forecast. TNB’s FY17 CNP (excluding foreign-exchange gain and RM150 million accrued interest from its power-purchase agreement savings fund) came in at RM9.5 billion. TNB changed its financial year end from Aug 31 to Dec 31 and we have adjusted our earnings forecasts accordingly. No comparation can be made for this period due to the change in financial year end.

For the period of one month from Dec 1, 2017 to Dec 31, 2017, TNB recorded a revenue of RM4.2 billion and a core profit of RM610 million. The December tax rate was higher at 23% versus a historical trend of 10% to 15%, on the back of reversal of tax provision. Electricity demand growth for the month was 1.6% year-on-year (y-o-y), driven by higher demand in domestic (+1.1% y-o-y) and industrial (+4.1% y-o-y, due to stronger exports). Commercial sector’s demand continued to trend downwards by 1.2% y-o-y.

To recap, TNB paid out a total dividend per share (DPS) of 61 sen (single-tier interim DPS of 17 sen and final DPS of 44 sen) as of Aug 31, 2017. For the additional four months from Sept 1, 2017 to Dec 31, 2017, the group declared a final DPS of 21.4 sen, which translated into a 50% payout ratio. The payout was at the upper range of its dividend policy (dividend payout ratio of 30%-60%), and we believe the dividend payout is sustainable.

We observe a slowdown in overall electricity demand growth as the demand growth for the period of between September and November 2017 slowed to 1.2% versus 3.6% for the corresponding period in 2016 as the commercial segment recorded a negative growth of 2% y-o-y. We believe this signalled a slowdown in overall electricity demand as the September-to-November period is historically a strong quarter for demand growth. We maintain our electricity demand growth assumption at 2%, which is in line with management’s guidance.

We maintain “hold” on TNB despite it being one of the cheapest big-cap stocks in the market given that: i) earnings risks as the stable regulated earnings might not be able to offset the earnings downside from potentially lower electricity demand and weaker associate contributions, ii) the expected step-up in tax rate due to reduction in reinvestment allowance, iii) and share-price outperformance versus the FBM KLCI of about 8% in the past one year. The stock is currently trading at 13.1 times FY19 forecast price-earnings ratio (PER), which is the peer average.

We leave our FY18-FY19 forecast earnings per share unchanged given the in-line results. Our TP stays at RM16.70, still pegged to a FY19 forecast PER of 14 times, the sector average. — CGSCIMB Research, Feb 28