Analysts positive on TNB’s RP2 extension

The government’s approval of the one-year extension of the second regulatory period (RP2) is a positive development for Tenaga Nasional Bhd (TNB), as it underpins near-term regulated earnings visibility.

MIDF Amanah Investment Bank Bhd (MIDF Research) estimated the extension to account for about 80% of TNB’s overall group earnings for the financial year 2021 (FY21).

The RP2 for 2021 would allow TNB and the Energy Commission to determine better the starting base of demand and capital expenditure for RP3, as well as better forecast fuel prices to minimise considerable fluctuations in the imbalance cost pass-through mechanism.

Last Wednesday, the government announced the extension of the RP2 base tariff of 39.45 sen per kilowatt-hour for another year, while RP3 has been shifted to start a year later on Jan 1, 2022, and end on Dec 31, 2024.

MIDF Research, in a report, stated that the power utility’s share price has retraced significantly by some 16% in the past 12 months, and it is trading at just 13 times its forecast FY21 earnings, reflecting deep undervaluation, not withstanding the persistent environmental, social and governance valuation drag.

“The dividend yield of 4% is reasonably attractive in the current low interest-rate environment, underpinned by easing capital expenditure (capex) for domestic generation in the nearto mid-term, which suggests base dividends are at least at the higher end of the group’s 30% to 60% payout policy,” it noted.

MIDF Research maintained its ‘Buy’ call with an unchanged target price (TP) of RM13.10 for TNB.

CGS-CIMB Securities Sdn Bhd stated that the RP2 extension is positive for TNB as its regulated business earnings profile should be stable due to the extension.

“We gather that the regulated return for 2021 is 7.3%, similar to RP2. The approved capex for TNB’s regulated business, under the incentive-based regulation, is around RM7.3 billion for 2021, which is similar to RP2’s average capex of RM6.3 billion per annum, supporting our view that TNB’s regulated asset base will likely grow at an average growth rate of 4% per annum.

“For 2021, we also gather that TNB’s piped gas cost is higher at RM27.20 per million British Thermal Unit (MMBtu) compared to RM24.20 per MMBtu in RP2, while its base price for coal would decline to US$67 (RM272.02) a tonne from US$75, following the market price,” the research house said.

It reiterated its ‘Add’ call on TNB with an unchanged TP of RM13.20, based on 15 times the group’s forecast 2021 price-to-earnings ratio.

Meanwhile, TNB entered into a concession agreement with Malaysia Airports (Sepang) Sdn Bhd to maintain and upgrade a district cooling co-generation plant last Wednesday.

The plant will produce, sell, market, distribute and supply cooling energy and electricity at Kuala Lumpur International Airport for 20 years, effective July 1, 2021.

Public Investment Bank Bhd is positive the concession will generate additional recurring income to TNB for the next two decades.

“We make no changes to our earnings forecast as we believe the overall impact to the group’s earnings would be minimal,” analyst Nur Farah Syifaa’ Mohamad Fu’ad said in a note.

The research house upgraded TNB from ‘Neutral’ to ‘Outperform’ with a TP of RM12.42.

Speculation is rife that TNB president and CEO Datuk Seri Amir Hamzah Azizan’s term could be cut short as his appointment was made under the Pakatan Harapan rule.

A replacement for Amir Hamzah, however, remains vague if he gets the boot.

If the position is filled by an in-house candidate, those who could be in line include chief corporate officer Datuk Wira Roslan Ab Rahman, chief power generation officer Datuk Nor Azman Mufti, chief distribution network officer Datuk Baharin Din and chief retail officer Datuk Megat Jalaluddin Megat Hassan.

Source: The Malaysian Reserve


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