Maybank IB Research retains Buy for Tenaga, TP RM14


  • Analyst Reports
  • Thursday, 19 Mar 2020

KUALA LUMPUR: Maybank Investment Bank Research believes the current headwinds of potential demand weakness and tariff discounts are unlikely to have a material impact on Tenaga Nasional’s financials given the prevailing tariff framework.

“Tenaga’s recent share price correction thus appears overdone in our view. Reiterate Buy with an unchanged RM14 target price, ” it said on Thursday.

Maybank Research pointed out as the Malaysia economy grapples with the effects of Covid-19, electricity demand from the industrial and commercial segments could potentially be impacted.

However, under the IBR framework, Tenaga is relatively sheltered from the effects of demand fluctuations, with only the “Customer Services” segment (RM1.1bil of annual revenue) subjected to demand risk.

The underlying demand growth for RP2 is c.2% per annum (2019: 2.7%). For sensitivity purposes, a 1% demand change would only move FY20 net profit by a mere 0.2%.

“Tenaga estimates the twin measures of 1) a 15% tariff discount to tourism-related segments and, 2) a 2% blanket tariff discount from April to September 2020 (as outlined in the 2020 Economic Stimulus Package) at RM500mil.

This would be funded entirely from the Electricity Industry Fund, leaving Tenaga financially neutral.

With coal prices trending below reference year-to-date, the research house expects continued inflows into the Industry Fund with Tenaga likely over-recovering on generation costs.

“Our RM14 TP is discounted cashflow based, assuming 7.5% WACC and 1% long-term growth. Tenaga offers a relatively decent recurring dividend yield of c.5%.

“On valuations, Tenaga’s current rolling PER of 12.5 times remains some way from the trough of 8.3 times in August 2015, when concerns over a bailout of Edra (no longer relevant) and doubts over the pass-through mechanism (since dissipated) prevailed, ” Maybank Research said.

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