This article first appeared in The Edge Malaysia Weekly on September 28, 2020 - October 4, 2020

THE analyst fraternity that covers ­utility giant Tenaga Nasional Bhd almost unanimously views the company’s prospects in a positive light. Of the 20 analysts and research houses that cover Tenaga, only one has an “overweight/cautious call”, which is negative, while five have “neutral” or “hold” calls and the remaining 14, or 70% of those who cover the counter, have “buy”, “outperform”, “add” or “overweight” calls.

Target prices, meanwhile, range from RM11.10 to RM14.27. Ironically, Morgan Stanley, which has the only “overweight/cautious” call of the many analysts that cover the utility company, has the highest target price for Tenaga at RM14.27, a 32% premium to Tenaga’s closing price of RM10.82 last Thursday. Tenaga’s stock hit a five-year low of RM10.36 in intraday trade on March 17 this year and has not really recovered. Its 52-week high of RM13.43 was in early November last year.

At its close last Thursday, Tenaga had a market capitalisation of RM61.72 billion, making it the third largest company on the local bourse, behind only Malayan Banking Bhd and Top Glove Corp Bhd. At last Thursday’s close, Tenaga’s stock was trading at a price-earnings multiple of about 19 times, and had an indicative gross dividend yield of about 3.6%.

While it has always been a favourite of the investment fraternity, year to date the company’s shares have underperformed the benchmark FBM KLCI by about 10%.

Details are scarce, but one reason for Tenaga’s lacklustre performance could be the exodus by foreign investors.

MIDF had it that until early September this year, foreigners were net sellers on Bursa Malaysia, disposing of RM20.94 billion worth of equities. To put things in perspective, in a report at end-August, Credit Suisse wrote that Tenaga’s foreign shareholding had fallen to a multi-year low of 15.6%.

According to Tenaga’s 2019 annual report, in early March this year, the company’s foreign shareholding was 17.6%. According to its 2018 annual report, at end-December 2018, its foreign shareholding stood at 20.8%. Given that Tenaga has a share base of 5.7 billion shares, these percentages translate into a huge number of shares. For instance, the difference between 20.8% and 15.6% is close to 300 million shares.

So, is the trimming of stakes by the foreign shareholders adversely impacting the company’s share price, and aren’t the local funds mopping up Tenaga shares that the foreigners disposed of?

Tenaga’s largest shareholder is sovereign wealth fund Khazanah Nasional Bhd, which has a 25.77% stake, followed by Permodalan Nasional Bhd and its various funds with about 18%, the Employees Provident Fund (17.39%) and Kumpulan Wang Amanah Pencen (Diperbadankan) or KWAP (7.22%). According to Tenaga’s 2019 annual report, as at early March 2020, government-related agencies controlled 68.6% of Tenaga’s equity interest.

A fund manager with a foreign asset management company says Tenaga’s weak share price can be attributed to the uncertain political climate.

“I mean they (Tenaga) run on a RAB (Regulated Asset Base) and fixed margins are all decided by the government … hence the uncertain political climate makes them less attractive,” he says.

An analyst from a foreign brokerage says Tenaga’s weak share price can be attributed to a number of factors, including environmental, social and governance or ESG issues, as coal-fired power plants are frowned upon.

According to Tenaga’s FY2019 annual report, its generation fuel mix is 53.9% coal, 42.3% gas, 3.1% hydro, 0.6% solar and 0.1% other forms of fuel.

Tenaga has been addressing its dependence on coal and has stated that the 2,000mw Jimah East Power Plant in Port Dickson, Negeri Sembilan, which commenced operations last year, would be the last greenfield, coal-fired power plant in Malaysia, and that it will shift towards green energy.

Also, Tenaga’s earnings were adversely hit by Covid-19, and this did not help its share price either. “But then again, Covid-19 is a transient issue,” the analyst says, adding that Tenaga’s share price could gain traction once things stabilise.

For its six months ended June 2020, Tenaga chalked up RM1.37 billion in net profit from RM22.54 billion in revenue. Compared with a year ago, net profits were down 48.69% while revenue slipped 13.55%.

Tenaga says the weaker showing was mainly due to a drop in the Imbalance Cost Pass-Through (ICPT) of RM2.32 billion and the 8.1% fall in the sales of electricity amounting to RM1.2 billion, owing largely to the decline in certain customer segments because of the Covid-19 outbreak.

“Operating profit fell 11.6% to RM4.05 billion compared with RM4.58 billion a year ago. Profit after taxation for the current period under review reduced by RM1.24 billion, from RM2.65 billion reported during the last corresponding period to RM1.41 billion, mainly due to a weakened ringgit against the last corresponding period and to a higher finance cost of the newly commissioned Jimah East Power Plant,” says Tenaga.

JP Morgan, in a report released after Tenaga announced its financials at end-August, says, “The weakness (in earnings) was primarily driven by the effective tax rate of 35.3% (up from 27.5% in 1Q2020) due to delays in claiming for non-completed project expenditure.”

The research outfit adds, “The Covid-19 impact on 1H2020 earnings saw a ~RM240 million lower contribution from subsidiaries; ~RM120 million retail losses and RM220 million lower capital allowance due to delay in project completion. On a 1H2020 basis, ‘recurring’ earnings came in at ~RM2.3 billion, down 51% year on year.”

On its prospects, Tenaga says, “The Malaysian economy registered a contraction of 17.1% in the second quarter of 2020, due to the stringent containment measures to control the Covid-19 pandemic, which included various measures that restricted production and consumption activities. However, the Malaysian economy is expected to recover gradually in the second half of 2020 as the economy progressively reopens and external demand improves.

“The Malaysian economy is forecast to grow [between -5.5% and -3.5%] in 2020, before staging a rebound [to grow from] 5.5% to 8% in 2021,” Tenaga adds.

As at end-June, Tenaga had deposits, bank and cash balances of RM7.32 billion. On the other side of the balance sheet, long- and short-term debts stood at RM42.51 billion and RM4.8 billion respectively.

While Tenaga’s finance costs for the six months ended June seemed high at RM1.81 billion, it had retained profits of RM51.69 billion.

JP Morgan says, “We continue to retain an ‘overweight’ rating as we expect to see an earnings recovery in 2H2020, along with the positive impact from delays in potential tariff adjustments until FY2022.”

JP Morgan sees Tenaga raking in after-tax profits of RM4.47 billion from RM51.85 billion in revenue for FY2020. The research house has a target price of RM14.20 for Tenaga’s stock.

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