Kenanga Research said it continues to like TNB for its resilient earnings profile, safeguarded by the ICPT mechanism.
KUALA LUMPUR: Tenaga Nasional Bhd
’s (TNB) earnings are expected to be resilient going forward, as the ballooning under-recovery of fuel costs will eventually be recovered under the incentive-based regulatory framework, albeit with a six-month lag.
According to Kenanga Research, TNB has received RM4bil in imbalance cost pass-through (ICPT) recovery claims for January 2023, with a balance of RM6.4bil to be paid in five equal instalments until June 2023.
Kenanga Research said it continues to like TNB for its resilient earnings profile, which is safeguarded by the ICPT mechanism, being a proxy for Malaysia’s domestic consumption recovery, and its heavyweight index-linked stock status.
“Furthermore, its dividend yield is decent at more than 4%,” said the research unit.
However, Kenanga Research cut its call on TNB’s stock to “market perform” from “outperform” given its recent solid share price performance (14% jump in the past three months).
TNB’s target price was also cut to RM10 (from RM10.17), based on a 5% discount due to its two-star environmental, social and governance (ESG) rating and the research unit’s discounted cash flow (DCF) derived valuation of RM10.52.
Kenanga Research pointed out that risks include a ballooning under-recovery of fuel costs, straining its cash flow, a global recession hurting demand for electricity, and non-compliance with ESG standards set by various stakeholders.
The research unit noted that TNB’s core profit in the financial year ended Dec 31, 2022 (FY22) had declined 20% despite a 6% increase in turnover (led by commercial of more than 16%) due to an 89% surge in fuel costs.
For the fourth quarter ended Dec 31, 2022 (4Q22), core profit plunged 65% to RM472.2mil (from RM1.33bil) while revenue was flat at RM12.92bil.
Meanwhile, Maybank Investment Bank (IB) Research said that while TNB’s under-recoveries (of generation costs) remain elevated, receivables would have likely peaked in 4Q22, with coal prices having trended lower.
“The average coal cost was up marginally quarter-on-quarter, thus TNB’s under-recoveries remained elevated at RM6.4bil (from RM6.1bil in 3Q22),” said Maybank IB Research.
The research unit pointed out that 4Q22 generation declined 3.6% quarter-on-quarter (q-o-q) as demand declined correspondingly by 3.1% q-o-q.
“For the full year, FY22 demand was up a healthy 6%,” said Maybank IB Research.
Meanwhile, regulated revenue remained in surplus (RM99mil) in 4Q22.
The research unit said TNB’s 4Q22 results were in line with its forecasts, as the group posted sequentially lower net profit due to the seasonal back-loading of general expenses.
Maybank IB Research maintained its “hold” call on TNB’s stock with an unchanged RM10 target price (DCF-based).
