By Xavier Kong
Business model: Tenaga Nasional Bhd (TNB) was founded in 1949 and its core business is the generation, transmission, distribution and sale of electricity in Malaysia. The company also manages and operates the national power grid, which is connected to Thailand and Singapore’s respective transmission systems.
Serving as the largest electricity provider in Malaysia, the group has received approval to cut electricity rebates by 32%, which results in heavier tariffs for heavy users and industries. TNB notes that its operations and earnings would remain largely unaffected by the revision that will take effect come January 1, 2016.
Shareholders and management: Khazanah Nasional Bhd remains the largest shareholder in TNB, with a stake of 29.66%. Khazanah is followed by The Employees Provident Fund (EPF) with a 16.9% stake, as well as Permodalan Nasional Bhd with a 12.95% stake.
Helming TNB is Azman Mohd, who has been working his way up the corporate ladder in the utilities player since he was 23 years old. Before taking on the role of president and chief executive officer in July 2012, he had served as a district office electrical engineer, state general manager, senior general manager of an operational region, and also the vice-president of distribution.
Share price performance: TNB began the year trading strong, hitting an intra-year high of RM15.10 on January 23, 2015. However, TNB shares saw a sharp plunge in August, following the announcement by the group that they would be bidding for 1Malaysia Development Bhd’s power assets. TNB ultimately lost the bidding.
The controversy attached to 1MDB hit TNB as well, which saw share value drop to an intra-year low of RM10.36 on August 24, 2015, before beginning to recover. TNB closed at RM13.14 on December 11, 2015.
What analysts think: Analysts are neutral to the announcement, as most note that this will have no significant impact on TNB’s earnings, due to the rebate reduction mainly targeting heavy users and industries. As a comparison, almost 70% of the group’s customers are domestic consumers, who generally stay below the 300kWh mark in terms of usage.
Maybank IB noted that the rebate staying around, despite the lower quantum, was TNB returning surplus earnings to the consumers, noting that “this in essence reflects a functional fuel cost pass-through mechanism”.
“Recall TNB’s base tariffs have been determined based on a set of reference fuel costs, and TNB is not meant to enjoy/suffer any earnings surplus/deficit from fuel cost deviations,” said the bank-backed research house.
TA Securities pointed out that the reduction in rebate “reflected positively on the government’s resolve to push through reforms”, amidst the risk of political backlash due to the rising cost of living, with tension already present following the recent hike in both toll rates and public transport fares.
TA also noted that, in the long run, TNB would still benefit, as the reform push “will ensure more transparency, as well as efficient pricing and usage of electricity”.
Noted as well by analysts was that the subsidy on gas for the power sector is being reduced, effective January 1, 2016. The new price will be RM18.20/mmBTU, from a previous RM16.70/mmBTU, which translates to increased costs for TNB moving forward, considering the group’s reliance on gas and coal.
Earnings forecast:
Stockstalk: Down to brass tacks, TNB remains a stock that displays strong fundamentals, due to the fact that it remains the largest power producer in Malaysia as well as sole distributor for Peninsular Malaysia and Sabah.
Following a failed bid to purchase 1MDB’s power assets, the counter has shown signs of recovery in prices. At the same time, that reforms are being pushed through could be a sign of greater transparency to come, which would further boost confidence in the counter.
However, investors are advised to take note of the issue that the subsidy for gas for the power sector is being lowered, which would in turn apply pressure to TNB. Moving forward, this means that TNB’s surplus earnings pretty much depends upon operational efficiency.
Still, the current rebate reduction should not affect TNB too much, due to the majority of its customer base remaining unaffected.
There is also the matter of the RM2.06 billion reinvestment allowance dispute with Inland Revenue, which could see pressure on the stock. However, this would be a one-off event, and should have little to no impact on the group’s earnings over the long-term.
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Important Note and Disclaimer: This article should NOT be taken as a cue to either buy or sell the stock. The intention is to highlight the key factors you might want to think about before plunging in or scrambling out. While KINIBIZ makes every endeavour to ensure facts are right and opinion is fair, no liability can be assumed for anyone relying on this information. In other words let the buyer (or seller) beware — a reflection of Bursa Malaysia, we say.
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