According to the Energy Commission (EC), electricity demand growth has been declining due to structural changes in the economy and increases in the electricity tariff.
KUALA LUMPUR: CGS-CIMB Research has raised Tenaga Nasional’s target price from RM13 to RM15.40 as it removes the 10% discount to the average sector price-to-earnings (P/E).
It said risks from the sector reform is low and it pegged its FY20F EPS to a higher sector average P/E of 15 times, previously 14 times, due to recent sector run up.
CGS-CIMB Research hosted a two-day non-deal roadshow for Tenaga in Singapore where it met 15 fund managers and buy-side analysts.
Investors were keen to know the future plan for the group’s overseas investments, risk arising from the upcoming power sector market reform in Malaysia, and guidance on its dividend payout.
“We like Tenaga given: (i) the regulatory risk from sector reform seems to be low, as Tenaga will likely maintain its monopoly in the transmission & distribution segments, and (ii) it is one of the cheapest big cap counters in the market with a decent dividend yield of c.4% for FY19-21F,” it said.
Tenaga is strengthening its overseas venture, especially its Turkey and India operations. Its 30%-owned Turkish assets under GAMA Enerji have been fully impaired from its initial RM1bil investment.
The operation has suffered losses due to the steep depreciation of the Turkish lira (TRY) from 3 TRY/US$ in 2016 to 5.6 currently, despite the company's still-decent asset quality. Its 840MW gas plant is highly ranked in terms of merit order for dispatch with a 80%-85% utilisation rate.
The upcoming Malaysia Energy Supply Industry (MESI) 2.0 reforms with the reactivation of MyPower 2.0, in CGS-CIMB Research’s view, could lead to further liberalisation across the value chains.
Tenaga is working closely with the regulators and we gather the market structure reform plan could be announced in 3Q19F.
“We believe the opening up of the retail space will likely have limited earnings impact on Tenaga, given that the average tariff for its customer service entity is only c.3% of total average tariffs of 39.45 sen/kWh.
“Tenaga had in Oct 2017 revised its dividend policy, to a dividend payout ratio of 30%-60%, from 30%-50% previously. The group paid out 50% of its adjusted earnings (excluding forex and non-cash items) in FY17 and 56% in FY18.
“We gather that Tenaga aims to dish out dividends towards the higher end of the band. We believe a 30%-60% dividend payout is sustainable, and there could be potential upside to our dividend forecast of 50% for FY19-21F,” CGS-CIMB Research said.
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