Minimal impact on Tenaga from retail market reforms


UOB Kay Hian Malaysia Research expects minimal impact on Tenaga Nasional Bhd if the government liberalises the electricity retail sector.

UOB Kay Hian Malaysia Research expects minimal impact on Tenaga Nasional Bhd if the government liberalises the electricity retail sector.

KUALA LUMPUR: UOB Kay Hian Malaysia Research expects minimal impact on Tenaga Nasional Bhd if the government liberalises the electricity retail sector.

The government is looking into the reforms which will result in a more competitive tariff for consumers. 

It said on Monday as the retail segment accounts for only 2% of TNB’s revenue, the sharp 4% share price retracement last Friday was unwarranted. 

“More importantly, the Incentive Based Regulation (IBR) is based on regulated asset. The retail segment is asset light and as such, TNB earns minimal profits as Peninsular Malaysia’s only retail electricity provider,” it said. 

To recap, Energy, Science, Technology, Environment and Climate Change Minister Yeo Bee Yin said a study is being conducted to determine whether the liberalisation of the electricity retail sector will result in more competitive tariffs for consumers. 

If the government decides to go ahead with the plan, this would mean TNB is no longer the sole choice for consumers in Peninsular Malaysia to buy electricity.

Last Friday,  TNB’s share price fell 4% partly as a result of the above newsflow. 

UOB Kay Hian Research believed the selldown was unwarranted and the share price weakness was an opportunity to accumulate for sustainable dividend yields of 4%.

It said the key rerating catalysts for the power sector include a) TNB or IPPs, such as Malakoff, YTLP or Edra Global Energy, winning new solar power plant contracts from the upcoming LSS3 tender; b) active capital management; and c) market reforms eliminating fuel risk for TNB.

“Our top pick is TNB (Buy/Target: RM15.10) for its good earnings visibility under the IBR framework and undemanding valuation. At our DCF-based target price, the stock would trade at 15 times FY19F PE and 7.6 times EV/Ebitda,” it said. 

TNB is trading at an attractive 13.6 times 2019F PE, below the market’s mid-teens valuation. Given the strong cash flow visibility under the IBR framework, the research house believes the valuation discount is unwarranted. Active capital management will provide scope for further share price upside. The stock offers a 4% dividend yield for 2019, it said.

As for Gas Malaysia (Hold/Target: RM2.90) offers stable operations and a mandate to pay out at least 70% of net profit to shareholders. 

UOB Kay Hian Research projects 2019 net dividend yield of 5.0% as IBR implementation (7.5% return on assets) will anchor earnings, and any fluctuation in gas prices will be passed through to end users (industrial). 

Gas Malaysia offers a 5-6% top-line growth thanks to strong take-up from the glove manufacturing, F&B, and glass sectors. A better entry level is at RM2.50, providing an upside of 15%.

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