Tenaga’s shares top gainer following sterling dividend

KUALA LUMPUR: Shares of Tenaga Nasional Bhd’s (TNB) reached a new all-time high yesterday following the group’s announcement of dividends amounting to RM3.5 billion – also a new record.

This came after TNB’s financial year 2017 (FY17) results came within expectations and analysts believe this to be due to its strong macro backdrop and solid growth in its industrial segment.

Yesterday, the shares was the top gainer on Bursa as it reached a high of RM15.46 during day trade. It closed at RM14.96 per share – an increase of 62 sen or 4.32 per cent – as 36.95 million shares were traded.

MIDF Amanah Investment Bank Bhd’s research arm (MIDF Research) said in a recent report: “Underpinning our view of TNB being a key proxy to the strong manufacturing growth, demand growth for the industrial segment grew by a whopping seven per cent year-on-year (y-o-y) in the fourth quarter of 2017 (an increase of 2.2 per cent in FY17) versus a two per cent contraction in FY16 and a 0.6 per cent growth in the first nine months of 2017 (9M17).

“Industrials account for the largest 40 per cent chunk of electricity sales. We see this momentum sustaining moving into FY18F on the back of a strong macro backdrop and electrical and electronics (E&E) driven export growth.”

MIDF Research noted that TNB reported 4Q17 core earnings of RM2 billion (excluding circa RM300 million in provisions and write-offs), which brought FY17 core earnings to RM7.7 billion accounting for 104 and 102 per cent of forecasts respectively.

TNB’s 4Q17 operating profit was up 12 per cent y-o-y on the back of higher demand growth (two per cent y-o-y) and it also saw ICPT recovery in the period.

The research team noted that TNB’s core net profit grew by a slower seven per cent y-o-y due to higher effective tax rate of 16 per cent compared with seven per cent in 4Q16.

Meanwhile, it pointed out that the Regulatory Period 2 (RP2) uncertainties are weighing down on TNB’s share price.

“TNB is still in discussions with the regulators on the RP2 terms and forecasts. RP1 will be reaching an end towards December 2017. Concerns on allowable returns in RP2 has been weighing down on TNB’s share price given the large discrepancy between TNB’s recommendations on cost of equity (Ce) compared with the regulator’s in determining allowable ROAs in the first IBR period.

“Nonetheless, we think current price levels have more than reflected this risk,” it added.

“In a worst case scenario where allowable returns are reduced to 6.5 per cent from the current 7.5 per cent, we estimate a circa RM485 million per annum, or seven to eight per cent impact to TNB’s bottomline.

“Our target price falls to RM15.40 per share (from RM16.80 per hare currently) if we factor in this’worst case’ scenario, which still entails meaningful upside against the depressed RM14.20 per share levels TNB is trading at currently,” it said.

All in, the research team maintained a ‘buy’ call on the stock.

TNB is a liquid proxy to the GDP growth and trade upcycle, but yet remains a laggard compared with the broader market. It said, foreign shareholding is already near historical trough at 24 per cent compared with a peak of 29 per cent.

“Two key concerns that have been weighing down on Tenaga have been uncertainties on RP2 allowable returns and second, inefficient balance sheet management.”

“The latter has been addressed by a meaningful increase in dividends. Details on RP2 should be out by year end,” it added.