This article first appeared in The Edge Financial Daily on January 29, 2019

Tenaga Nasional Bhd
(Jan 28, RM13.58)
Maintain hold with a lower target price (TP) of RM13.30: We cut our financial year 2018 (FY18) to FY20F (forecast) earnings per share by 1% to 12% to factor in the full impact of revenue reversal and higher staff costs. TP is lowered to RM13.30, based on a 10% discount to the sector average FY19F price-earnings (PE) of 14 times. Maintain “hold” despite the stock being one of the cheapest big-cap stocks in the market given: i) earnings risks, as the stable regulated earnings might not be able to offset the earnings downside from the expected step up in the tax rate; and ii) potential changes in regulations and policies for the utilities sector.

As new entrants in the retail segment are nothing new, we met with Tenaga Nasional Bhd (TNB) to seek more clarity on the potential earnings impact arising from the market structure reform plan slated to be announced in second quarter of 2019. We gathered that new entrants in the retail segment are nothing new, as TNB has been selling bulk electricity to Kuala Lumpur Sentral and the Kuala Lumpur International Airport, where both act as retailers to connect electricity and collect electricity payments (retailers fall under customer service entities in the incentive-based regulation [IBR]).

With potential separation of single buyer entity from TNB, the single buyer entity could be separated out from TNB under the market reform, but we expect limited earnings impact on the group as the entity’s regulated asset base is less than RM25 million. The potential separation could be good for TNB’s cash flow as the group will not need to bear the risk arising from imbalance cost pass-through (ICPT). However, the regulator will need to find another party with a solid balance sheet in order to honour the power purchase agreements and stomach the fluctuations of the ICPT upfront.

The key downside risks are weaker contribution from associates and potential sector reforms. The key upside risk is stronger-than-expected earnings from associates. — CGSCIMB, Jan 28