Bullish view on group’s long-term growth, cash flow

New Straits Times - - Business - ZURAIMI AB­DUL­LAH bt@me­di­

TENAGA Na­sional Bhd (TNB) re­mains a favourite stock among an­a­lysts, de­spite its share price shed­ding eight sen since the first trad­ing day of this year.

The un­der­ly­ing rea­son is that TNB has been re­silient, showed good prof­itabil­ity and con­tin­ued to ride out eco­nomic tur­bu­lence.

A poll of 24 an­a­lysts by Bloomberg showed 17 had a “buy” call, four tagged a “hold” and three rec­om­mended sell­ing.

The tar­get price ranges from a high of RM19.36 by AmIn­vest­ment Bank Bhd to a low of RM12.50 by Credit Suisse. Over­all, the con­sen­sus ex­pects a po­ten­tial re­turn of 17.6 per cent.

TNB closed two sen lower at RM13.72 with 87,000 shares traded on Fri­day.

An­a­lysts are gen­er­ally bullish about TNB’s long-term growth and strong cash flow.

They said the group’s earn­ings and cash flow should be sta­ble due to the im­ple­men­ta­tion of the in­cen­tive-based reg­u­la­tion (IBR) frame­work.

The ex­pected IBR re­vi­sion to lower re­turn on reg­u­lated as­sets by next year will be off­set by new con­tri­bu­tions from as­so­ciates and power plants, they added.

The gov­ern­ment im­ple­mented the IBR for TNB on Jan­uary 1 2014, ef­fec­tive for three years with a re­turn on as­set of 7.5 per cent, ex­pir­ing this year.

There­after, the gov­ern­ment and TNB will re­view the capex re­quire­ment and key op­er­at­ing pa­ram­e­ters for the sec­ond reg­u­la­tory pe­riod from 2018 to 2020.

TNB’s first quar­ter ended Novem­ber last year’s core earn­ings of RM2.3 bil­lion is 27.2 per cent of Hong Leong Bank Bhd’s fi­nan­cial year 2017 (FY17) es­ti­mate, but bet­ter than con­sen­sus es­ti­mate of 30.7 per cent.

Al­lianceDBS Re­search Sdn Bhd said TNB was the largest ben­e­fi­ciary of the Im­bal­ance Cost Pass-Through mech­a­nism un­der the IBR.

The firm be­lieves the group would ben­e­fit from sus­tain­able de­mand growth, backed by the rel­a­tively steady eco­nomic out­look.

“In ad­di­tion, TNB’s new gen­er­a­tion ca­pac­ity will pro­gres­sively boost its ca­pac­ity by about 30 per cent by 2019,” it said.

Cur­rently, TNB is un­der­tak­ing three gen­er­a­tions projects, namely Man­jung 5, Jimah East Power and Tem­bat with over 3,000 megawatt ca­pac­i­ties. They are due to be com­pleted be­tween this year and 2019.

Their cap­i­tal ex­pen­di­ture (capex) in­vest­ment rep­re­sented 45.4 per cent of TNB’s to­tal capex in­vest­ment of RM2.07 bil­lion in the first quar­ter of FY17.

May­bank In­vest­ment Bank Bhd (May­bank IB) said TNB was still its top buy pick with RM16.40 tar­get price, given its com­pelling val­u­a­tions, sta­ble earn­ings and pos­si­bil­ity of higher div­i­dends.

The tar­get price is based on dis­counted cash flow.

“(TNB’s) weighted av­er­age cost of cap­i­tal is 7.5 per cent while long-term growth is one per cent. This im­plies a price-earn­ings ra­tio of 12.3 times for FY2017 end­ing Au­gust ver­sus 10.5 times cur­rently,” said May­bank IB an­a­lyst Wong Chew Hann.

May­bank IB said reg­u­la­tory de­vel­op­ments would con­tinue to be the over­rid­ing theme for TNB.

How­ever, it said the de­vel­op­ments were un­likely to ad­versely im­pact prof­itabil­ity, and that its share price would re­cover when clar­ity emerged.

The firm also noted that TNB’s elec­tric­ity de­mand grew 3.6 per cent in the first quar­ter of FY17.

An­a­lysts said TNB would not be af­fected by the re­cent surge in prices of coal price, gas and liq­ue­fied nat­u­ral gas.

TNB would ei­ther re­ceive higher ef­fec­tive tar­iff (sur­plus charge on top of ex­ist­ing base tar­iff ) or in the form of com­pen­sa­tion from gov­ern­ment, they added.

The gov­ern­ment still has sav­ings of RM1.4 bil­lion from first­gen­er­a­tion power pur­chase agree­ments rene­go­ti­a­tion.

TNB will ben­e­fit from sus­tain­able de­mand growth... and its new gen­er­a­tion ca­pac­ity will pro­gres­sively boost ca­pac­ity by 30 per cent by 2019 AL­LIANCE DBS RE­SEARCH SDN BHD

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