MARC affirms Tenaga's corporate credit rating at AAA

KUALA LUMPUR: Malaysian Rating Corporation (MARC) has affirmed its corporate credit rating on Tenaga Nasional Bhd (TNB) at AAA and its sukuk rating on the power giant’s RM2bil Al-Bai’ Bithaman Ajil Bonds at AAAIS. 

It said on Friday the ratings outlook was stable. TNB’s ratings benefit from a two-notch uplift to reflect MARC's assessment of a high likelihood of government support premised on TNB’s standalone corporate credit rating of AA/Stable. 

“The support assessment also considers the government’s indirect majority ownership in TNB which provides it with considerable leeway to influence the utility company’s strategic direction. 

“TNB’s credit strength reflects its monopoly on electricity transmission and distribution in Peninsular Malaysia and Sabah, its significant electricity generation capacity and strong operational track record with a generation capacity amounting to 13,158MW (54.1% of total installed capacity in Peninsular Malaysia) in 2018,” it said. 
 
TNB’s operating profit before interest, tax, depreciation and amortisation (Opbitda) margin declined to 28.7% in 2018 (PE2017: 32.3%, FY2017: 32.6%) on the back of higher fuel costs and operating expenses.

 Against a backdrop of moderating revenue growth prospects and increasing operating expenses, the rating agency expects TNB to manage its operational costs more prudently going forward. 

“As more consumers manage their energy usage to incorporate energy efficiency targets, MARC believes electricity growth will remain tepid over the medium term. 

“The implementation of MFRS 16 beginning Jan 1, 2019 onwards may impact TNB’s profitability margins. MARC will continue to monitor the impact of MFRS 16 on TNB’s financials,” it said. 

Despite posting lower net profit of RM3.7bil, TNB group’s cash flow from operations (CFO) stood higher at RM14.4bil, while its CFO interest coverage and CFO debt coverage stood lower at 7.21 times and 0.22 times. 

TNB’s free cash flow stood at negative RM1.9bil, after the disbursement of capex amounting to RM11.8 bil. 

As at 2018, major generation projects comprised 30.5% of TNB’s capex while recurring capex formed the remaining 55.5%. 

As at end-2018, TNB’s total borrowings increased by 13% to RM52.4bil on the back of the RM3bil Sukuk Wakalah issuance in August 2018 and the US$750mil multi-currency sukuk issuance in November 2018.

“TNB’s standalone rating could come under pressure if its leverage-related metrics continue to weaken in 2019. 

“TNB’s contingent liabilities, which include liquidity support provided to its subsidiaries in the form of completion support and rolling guarantees on power plant projects, remain a potential concern, “ it said. 
 
MARC said the stable outlook reflects its expectation that government support will be sustained in the next 12 to 18 months in view of TNB’s strategic importance to the nation’s energy distribution. 

Any weakening in TNB’s debt protection measures and/or liquidity buffer would exert pressure on its standalone rating, it added.