PETALING JAYA: Maybank IB Research has upgraded its call on Tenaga Nasional Bhd (TNB) from “hold” to “buy”, citing improved earnings stability for the power company.
The research house said this was due to the more automatic pass-through mechanism in the recently-released Regulatory Period 2 (RP2) guidelines.
The research house, however, lowered its earnings forecast for FY18, FY19 and FY20 by 2%, 3% and 5% respectively as it revised the demand and cost assumptions.
Its target price has also been revised to RM15.50 from RM15.60.
The research house said the earnings step-down highlighted at the onset of RP2 turned out to be more pronounced than expected.
“Three quarterly results, two tariff surcharges and 11% share price decline (over 2018) later, we believe investors’ earnings expectations have sufficiently tapered,” it said. The upgrade to “buy” is due to a favourable risk-reward view.
A 60% payout ratio remains a possibility and would lift dividend yield to above 4%.
Maybank IB Research also said sentiment on the TNB stock has been weak following the release of weak results in November for the third quarter last year.
“The impairment of TNB’s Turkish associate Gama Enerji Anonim Sirketi due to the lira depreciation, higher staff costs from adjustment of the collective agreement and lower reinvestment were easily understood but the market struggled with the seemingly low Imbalance Cost Pass-Through (ICPT) adjustment amid a spike in coal prices in the quarter.
“Subsequently, speculation on potential industry reforms took on a negative spin, resulting in heightened concerns over the possible impact to TNB,” it said, adding that some of the concerns were potentially overblown.
It also does not view competition having a significant impact on transmission and distribution tariffs.
Gas and coal-fired independent power producers (IPP) also do not pose any demand risk as they are currently compensated based on availability.
It is also of the opinion that the existing Power Purchase Agreement (PPA) framework would not be dismantled in the near future en route to full liberalisation for the power market as there are new plants with PPAs expiring beyond 2040.
Premature termination will require compensation and the scenario is unlikely due to the stretched government finances currently.
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