This article first appeared in The Edge Financial Daily on April 15, 2019
Tenaga Nasional Bhd
(April 12, RM12.28)
Upgrade to trading buy with an unchanged target price (TP) of RM14.12. Bloomberg reported that Khazanah Nasional Bhd has sold 85 million shares in Tenaga Nasional (TNB) at RM12.33 per share.
Following this, TNB’s share price fell by as much as 6% last Thursday, before settling at -4%. Year to date (YTD), it has contracted by 21.2%, largely due to lower rate of return on regulated asset base (RAB) of 7.3% set in the second regulatory period (2018-2020), compared with 7.5% in the first regulatory period (2015-2017).
While the incentive-based regulation (IBR) framework would cap the return on TNB’s regulated assets, we believe its profitability could still be improved through cost efficiency and higher return on its non-regulated assets (NRA). We are maintaining our earnings forecasts with an unchanged discounted cash flow-based TP of RM14.12. Although Thursday’s sentiment was dragged by news of Khazanah’s disposal, TNB’s fundamentals remain unaffected and hence, we see the weakness in share price as a good opportunity to accumulate.
Our TP implies an upside potential of 17% and therefore, we upgrade our call from “neutral” to “trading buy”. Also note that at current market price, TNB’s dividend yield of 4% looks attractive.
TNB announced that Khazanah has disposed of 85 million of shares last Thursday. This accounted for only a 1.5% stake in TNB, resulting in Khazanah’s shareholding falling to 27.27%, from 28.76% previously. Khazanah remains the single-largest shareholder of TNB.
According to Bloomberg, the disposal of shares by Khazanah was worth about RM1 billion at a price of RM12.33 per share. This represents a 2% discount to its last closing price of RM12.58. Although we believe the disposal is part of asset value realisation by Khazanah, TNB remains a strategic holding of the Malaysian sovereign wealth fund.
The share price has contracted by 21.2% YTD, largely due to lower rate of return on RAB of 7.3%. Given that TNB’s market capitalisation has declined by RM18.5 billion or 21.2% YTD, compared to a loss in revenue of about RM640 million in financial year 2018 (FY18), we feel the selldown is over-rated.
Under the IBR framework, any price adjustment on fuel and generation costs from the parameters set on its base tariff will be passed on to consumers under imbalance cost pass-through mechanism for every six months. For the upcoming review in June 2019, we believe there is less pressure to hike the base tariff on residential customers due to the falling coal prices.
In any case, we believe there is still remaining funds available (we estimate the savings are close to RM1 billion, after including the excess revenue collected from FY18) in the Kumpulan Wang Industri Elektrik to be used to subsidise any residential customer surcharge. — PublicInvest Research, April 12