Tenaga’s earnings growth capped, but quality still strong
KOTA KINABALU: While the new regulatory period 2 (RP2) has capped Tenaga Nasional Bhd’s (Tenaga) earnings upside by restricting its asset returns, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) is still optimistic on the integrated utility company due to its high earnings certainty.
In a company update report, Kenanga Research noted that under RP2, TNB will have its asset returns capped at 7.3 per cent which is embedded with 2 per cent demand growth and will no longer be enjoying higher base tariffs from the change of customer mix which was enjoyed under RP1 during 2014 to 2017.
“The new tariff is instead set at 39.45 and is based on a coal generation mix of 61 per cent which took account of the new coal-fired plant Jimah East powder that is expected to be fully up and running by the end of 2018,” it said in a report yesterday.
“On the matter of surplus however, the authorities have yet to decide whether surplus will be offset by rebate directly to consumers or to channel to Kumpulan Wang Industri Elektrik (KWIE). Either way, Kenanga Researc h is expecting the surcharge to continue in the near-term.
“In view of TNB’s requirement to use more less cost effective non-coal fuels, total fuel costs are expected to stay higher than generation mix set under RP2 before 2020; and assuming all fuel prices remain unchanged, the surcharge which happened for the second half of the year (2H18) is likely to persist at least until end-2019.”
It was announced by the Energy Ministry that the fund available for KWIE is RM760 million which we believe should be enough to offset the subsidy for domestic segment in 2019. Note that the subsidy for the 1.35 sen per kWh surcharge for domestic customer in 2H18 is circa RM100 million.
While the changes from RP1 to RP2 have certainty weakened TNB’s earnings upside, the research arm believes that this is offset by the company’s high earnings certainty and notes that TNB’s current valuation is still rather cheap despite its high earnings quality.
“With high earnings certainty despite capped upside and predictable dividend payout, the next question would be how we should value this heavyweight index stock.
“At 12-fold CY19 price earnings ratio (PER), TNB’s valuation is clearly highly undemanding against FBMKLCI’s 16-fold PER.
“In fact, Tenaga has been trading at discount to the overall market since mid-2011. It traded at 12.3 to 12.0 fold of 3-year and 5-year average PER, respectively, against FBMKLCI’s 16.6 to 17.0 fold.
“Meanwhile, at 40 per cent of our earnings payout assumption which yields 3.1 per cent for FY18, this is also slightly higher than the 30-stock index average of 2.8 per cent,” the research arm shared.
All in, Kenanga Research is maintaining its earnings forecast and earnings model for TNB despite the changes from RP2 and retained its ‘Outperform’ call on TNB with a target price of RM17.90.
While the target price of RM17.90 is much higher than TNB’s current share price of RM15.26 (at time of writing), the research arm opines that this is not excessive as it is based on CY19 14 fold PER with a +1.0SD of 2-year moving average.