This article first appeared in The Edge Financial Daily, on February 2, 2016.

Tenaga Nasional Bhd
(Jan 29, RM13.60)
Maintain buy with a target price (TP) of RM18.20: Tenaga Nasional Bhd’s (TNB) first quarter core earnings ended Nov 30, 2015 (1QFY16) were in line with our and consensus estimates, making up 28% and 30% respectively. 

Its core earnings grew 5% year-on-year (y-o-y) to RM2.03 billion, resulting from a higher electricity consumption in the peninsula, which grew 3.2% y-o-y. 

The gains had more than offset the higher effective tax rate of 10.9% during the quarter (1QFY15: 6.2%). 

While operating costs were flat, benefiting from cheaper gas prices, this was primarily offset by higher staff costs following the introduction of the long-term incentive plan, which cost RM44 million. 

TNB’s headline revenue and core earnings saw y-o-y declines of 3.2% and 12% respectively. This was due to the differing accounting treatment for the imbalance cost pass-through (ICPT). 

Net revenue figures (excluding the ICPT) were only reported from 3QFY15.

Adjusting for the ICPT over-recovery of RM486 million in 1QFY15 (RM365 million net of tax), 1QFY16 revenue grew 1.3% y-o-y, while the earnings before interest, taxes, depreciation and amortisation margin expanded by 1.6 percentage points y-o-y.

In view of the reduction in Malaysia’s official 2016 gross domestic production growth forecast to 4% to 4.5% (from 4% to 5%), the management has also guided for lower consumption growth going forward (1QFY16: 3.2%). 

As such, we view our 2.6% growth assumption as reasonable. 

We continue to like TNB for its defensive earnings, large market value and high share liquidity. 

We also expect TNB to gradually regain lost ground in the lucrative power generation business.

We also maintain our TP based on 14 times FY16 forecast earnings per share, which is at its five-year historical average price-earnings ratio of 14 times. 

Despite Malaysia’s dimming economic outlook, we maintain our forecasts as we believe the slower economic growth has been reflected in our assumptions. — RHB Research Institute, Jan 29