CIMB, TA maintains buy on TNB, despite 12% drop in earnings

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KUALA LUMPUR (Jan 25): Two research houses — CIMB Research and TA Research — is maintaining a buy call on the country’s sole electricity off-taker Tenaga Nasional Bhd (TNB), despite it reporting a 12% drop in earnings in the first quarter ended Nov 30, 2016 (1QFY17).

In a note to clients today, both research houses noted on TNB’s valuations, which CIMB Research had described as “cheap and undemanding”, while TA Research said it is “unjustifiable”.

As for CIMB Research, it is expecting the country’s sole electricity off-taker Tenaga Nasional Bhd (TNB) to report weaker earnings in future quarters due to higher operating expense, adding that the persistent weak economic condition could result in more provisions in the future.

“As we expect Malaysia's economic condition to remain weak in the near term, we believe provisions related to bad and doubtful debts could recur in the coming quarters,” CIMB Research analyst Saw Xiao Jun said in a note to clients today. “We cut our FY17-19F EPS by 3% to 6% to reflect mainly higher provision expenses.”

Yesterday, TNB announced that its net profit dropped 11.9% to RM1.74 billion in 1QFY17 from RM1.976 billion in 1QFY16, dented by foreign exchange losses which almost quadrupled to RM231.2 million.

CIMB Research also noted on TNB’s ability to raise tariffs in the second half of 2017 (2H17) and pass through the higher fuel costs to consumers, given that the current coal price is about US$87 per tonne, about 40% higher than its average coal cost of US$63 per tonne in 1QFY17.

“The management remains confident that the imbalance cost pass-through (ICPT) mechanism will shield the company’s earnings from fluctuation in fuel prices,” said CIMB Research.

Despite cuts on TNB’s earnings forecast and concerns over ICPT mechanism, CIMB Research is maintaining its “add” call on TNB, given its undemanding valuations, as it believe the cheap valuation has priced in all relevant risks.

It is worth noting that despite the add call, CIMB Research has cut TNB’s target price to RM16.30, from RM16.80 previously.

Meanwhile, TA Research said it favours TNB for having a stable core earnings, resilient balance sheet and decent yield, rendering it a safe refuge from macro headwinds.

“On top of that, potential earnings growth from international investments is shaping up. Note that the group targets to derive 20% profit contribution from its international investments,” the research house noted.

TA Research has a target price of RM17.19 on TNB.