This article first appeared in The Edge Financial Daily on March 5, 2020

Tenaga Nasional Bhd
(March 4, RM12.58)
Upgrade to buy with a lower target price of RM14.50: For the fourth quarter of financial year 2019 (4QFY19), Tenaga Nasional Bhd’s (TNB) core net profit fell to RM939 million on the back of unplanned outages and higher staff costs. Full FY19 core net profit of RM5,119 million (-4% year-on-year [y-o-y]) missed expectations, prompting us to cut 2020 net profit by 5%.

On a brighter note, TNB delivered a RM1 net dividend per share for FY19, including a special dividend of 50 sen per share. We believe the management will strive for active capital management given the healthy balance sheet (net gearing as at Dec 31, 2019 was less than 30% versus regulatory gearing of 55%).

TNB recorded lower revenue of RM12,177 million in 4QFY19 (-3% y-o-y; -4% quarter-on-quarter [q-o-q]). This reflects a 1.6% q-o-q decline in Peninsular Malaysia’s electricity demand on the back of weak iron and steel, electric and electronic, and cement demand. In 2019, Peninsular Malaysia experienced a healthy 2.7% y-o-y electricity demand growth.

Generation cost for 4Q19 fell 8% y-o-y as coal prices eased to US$70.20 per tonne (3QFY19: US$72.4/tonne, 4QFY18: US$99/tonne). Meanwhile, normalised 4QFY19 earnings before interest, tax, depreciation and amortisation of RM2,999 million (-19% y-o-y; -20% q-o-q) on the back of Manjung and Kapar’s unplanned outage and higher expenses booked in 4QFY19, namely RM300 million in corporate reorganisation, licensing and maintenance software cost and  property, plant and equipment write-down of Kapar investment.

Key rerating factors for the stock include active capital management, a fair outcome from the third regulatory period (RP3) - due for review by the end of 2020 — and operational savings from TNB’s reorganisation exercise.

Key risk to our call is an unfavourable outcome from RP3 discussions. We believe that the risk of lower returns to be accorded by the government in RP3 may limit share price performance beyond the first half of 2020. The transmission and distribution (T&D) divisions accounted for 60% of TNB’s group core net profit. Our current 2021-22 net profit forecast assumes a 7.3% rate of return for T&D. — UOB Kay Hian, March 2