Investment Highlights

• We maintain BUY on Tenaga Nasional (TNB) with a lower DCF-based fair value of RM11.80/share (terminal growth rate: 2%, WACC: 7%) vs. RM12.00/share previously. We ascribe a 3-star ESG rating to TNB.

• TNB’s net profit is expected to improve by 16.2% in FY23F after falling by 7.5% in FY22E due to the prosperity tax and higher depreciation expense. We reduce TNB’s normalised FY22E net profit by 8% to account for a higher effective tax rate of 30% compared with 24% originally.

• A concern with TNB is its RM14.1bil receivables (as of end March 2022). Out of these, about RM5.2bil were trade debtors. To manage shortfalls in working capital, TNB has lined up banking facilities. In June 2022, TNB raised RM4bil under the RM10bil Islamic medium-term notes programme. Prior to this, TNB raised RM1.5bil under the same programme to finance the development of the RM5bil 300MW Nenggiri hydroelectric power project in Kelantan.

• Most of TNB’s RM5.2bil trade debtors are from the commercial and industrial sectors. Commercial accounted for 37% of TNB’s trade debtors as of end March while the industrial sector made up another 26%. Hence, as economic activities of the commercial sector pick up, we believe that debtors would gradually pay their electricity bills.

• To ensure sufficient coal reserves and mitigate the risk of Indonesia banning exports again, TNB has diversified its list of suppliers. Apart from Indonesia, TNB now buys coal from Australia and South Africa. TNB usually keeps a month of coal and gas supplies. Recall that Indonesia banned exports of coal in January 2022.

• We have assumed an electricity sales volume growth of 1.7% for Peninsular Malaysia in FY22E. Although electricity sales volume growth was 4% YoY in 1QFY22, electricity demand may soften in 2HFY22. The industrial sector (petrochemical, electrical and engineering, iron and steel) may be affected by slower global economic growth in 2HFY22.

Source: AmInvest Research - 20 Jul 2022