Tenaga TNB MK Sector: Utilities

Transcription

1 Over-penalized We believe TNB is undervalued as its share price is not fully reflecting the removal of the overhang from the sale of Edra by 1MDB to a foreign party. Even without Edra, TNB would see its generation market share trend higher. We upgrade TNB to BUY with a revised TP of RM15.50 after rolling forward our valuation to FY16. Lag in re-rating Empirically, we believe the market had turned too negative during the period of uncertainty when there was speculation that TNB would buy Edra. Subsequently, we see that the market has yet to fully reflect the positive news last month that TNB had reportedly put in the lowest bid for Edra s assets and lost out to China General Nuclear Power Corporation (CGN). At TNB s current share price, its market cap stands at RM75.6bn and this still implies RM9bn in value destruction from its peak in Jan15. Generation market share likely to still trend higher Even without Edra s assets, TNB would see its domestic power generation capacity market share increase due to new hydro and gas power plants that are on track for commissioning by We estimate TNB s generation market share to increase to 51.2% in 2016 from 48.3% currently. Had TNB acquired Edra s assets, TNB s generation market share would have jumped to 69.2%. NEDA unlikely to have significant impact on TNB in short term For the existing PPAs, we believe the IPPs may not risk the visibility of their cash flows for potentially higher returns by competing for more dispatch through lowering their variable operating rates. NEDA also allows power plants that have expired PPAs to still sell power under a competitive priced-based bidding system but this represents a very small proportion. Upgrade to BUY with revised TP of RM15.50 We upgrade TNB to BUY from Hold after raising our DCF-derived (WACC: 8.1%, LT growth: 3.0%) TP to RM15.50 (previously RM12.00). We have rolled forward our valuation to FY16 and removed the discount on TNB following the sale of Edra to CGN, which removes the overhang that TNB may not get good value for Edra s assets. Our TP translates into a target FY16E PE of 11.9x, which we deem relatively undemanding given that TNB s forward PE was within an estimated range of 13-16x prior to the gas shortage issues in FY Earnings & Valuation Summary FYE 31 Aug E 2017E 2018E Revenue (RMm) 42, , , , ,981.3 EBITDA (RMm) 4, , , , ,813.5 Pretax profit (RMm) 7, , , , ,599.0 Net profit (RMm) 6, , , , ,786.1 EPS (sen) PER (x) Core net profit (RMm) 5, , , , ,786.1 Core EPS (sen) Core EPS growth (%) Core PER (x) Net DPS (sen) Dividend Yield (%) EV/EBITDA (x) Company Update Tenaga TNB MK Sector: Utilities 2 Dec 2015 BUY (upgrade) Upside 15% Price Target: RM15.50 Previous Target: RM12.00 (RM) Nov-12 May-13 Nov-13 May-14 Nov-14 May-15 Nov-15 Price Performance 1M 3M 12M Absolute +5.8% +20.5% -4.3% Rel to KLCI +5.0% +14.3% +1.9% Stock Data Issued shares (m) 5,643.6 Mkt cap (RMm)/(US$m) 75,624.4/17,863.3 Avg daily vol - 6mth (m) wk range (RM) Est free float 39% BV per share (RM) 8.36 P/BV (x) 1.60 Net cash/(debt) (RMm) (3Q15) (21,292) ROE (2015E) 14.5% Derivatives Nil Shariah Compliant Yes Key Shareholders Khazanah Nasional 29.7% EPF 16.9% PNB Source: Affin Hwang, Bloomberg 8.1% Lim Tee Yang, CFA (603) teeyang.lim@affinhwang.com Chg in EPS (%) Affin/Consensus (x) Source: Company, Affin Hwang forecasts, Bloomberg Page 1 of 10

2 Lag in re-rating How much is priced in? Empirically, we believe the market had been too negative during the period of uncertainty when there was speculation that TNB would buy Edra. Subsequently, we see that the market has yet to fully reflect the positive news last month that TNB had reportedly put in the lowest bid for Edra s assets and lost out to China General Nuclear Power Corporation (CGN). CGN won the bid for Edra s assets with a bid of RM9.83bn in cash and thus removes the overhang that TNB may not get good value for Edra s assets. At TNB s current share price of RM13.40, its market cap stands at RM75.6bn and this implies RM9bn in value destruction from its peak in Jan15. Note that the value destruction in TNB s market cap since its peak is also larger than the c.rm8bn bid that TNB had submitted for Edra. Recall that TNB s share price convincingly broke above RM12.00 in Oct14 before reaching its all-time high of RM14.99 (market cap of RM84.6bn) on 23 Jan The share price rally over this period was partly driven by two consecutive quarters of good results that exceeded expectations. We also note that during the time when 1MDB had initially planned to list Edra, there was no major impact on TNB s share price. However, TNB s share price corrected significantly when initial news reports first appeared in May15 which speculated that TNB will emerge as a potential buyer for Edra following Edra s aborted IPO. Fig 1: Key reference points surrounding Edra Date News Share Price (RM) Market Cap (RM bn) 01/11/2014 1MDB submits application for Edra s IPO that possibly could raise US$4bn /01/2015 TNB share price at all-time high /05/2015 TNB in talks with 1MDB over Project 3B /06/2015 Malaysian state fund 1MDB may scrap US$3bn power IPO /06/2015 TNB shares hit on reports of fund raising for buying 1MDB power plant /07/2015 TNB buys 1MDB S Project 3B for RM47m /10/2015 TNB submits conditional offer to acquire Edra's power assets /11/2015 Tenaga reportedly put in lowest bid for 1MDB power assets /11/2015 1MDB sells Edra power assets to China firm for nearly RM10bn cash Source: Various media, Affin Hwang There are two other important reference points to keep in mind over this period of uncertainty surrounding Edra. The first is news on 1MDB s planned US$3bn IPO for Edra when Tenaga s share price was hovering at RM The second and more important event is initial news reports speculating that TNB will emerge as a potential buyer for Edra on 13 May 2015 before Edra s IPO plans were finally cancelled on 19 Jul TNB s market cap had sunk to as low as RM58.4bn (share price of RM10.36) on 24 Aug 2015, which implied RM26.2bn in market cap lost from its Jan15 peak. Although the FBM KLCI also fell to its trough in Aug15 (YTD loss of 13.0%), in comparison, TNB s share price posted a much bigger YTD loss of 24.3%. Page 2 of 10

3 Fig 2: Share price movement of TNB (RM) TNB inks agreement for PPP 1MDB: Planned U$3b IPO for energy assets TNB discussing with 1MDB to buy Project 3B 1MDB scrapped IPO plans MDB buys Kuala Langat to become 2nd largest IPP in M sia Electricity tariff review in Peninsular Malaysia TNB tumbles RM1.30 on tariffs cut TNB submits indicative nonbinding proposal to acquire 1MDB energy assets TNB offered to build own and operate Prai Power Plant (PPP) 1MDB: RM1.2bn lost over power asset acquisitions TNB pulls out of Project Track 4A with SIPP MDB buys Tanjong Energy for RM 8.5bn 1MDB buys 75% of Jimah Power Plant for RM1.2bn TNB reportedly put in lowest bid for 1MDB power assets 0.00 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 Nov-13 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Source: Affin Hwang, Bloomberg, Various media Fig 3: YTD indexed performance of TNB and FBM KLCI TNB FBM KLCI Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Source: Affin Hwang, Bloomberg Page 3 of 10

4 Generation market share likely to still trend higher TNB to see new incoming capacity in 2016 and 2017 Even without Edra s assets, TNB would see its domestic power generation capacity market share increase due to new hydro and gas power plants that are on track for commissioning by We estimate TNB s generation market share to increase to 51.2% in 2016 from 48.3% currently. Had TNB acquired Edra s assets, TNB s generation market share would have jumped to 69.2%. TNB s domestic generation market share would likely stay high going forward, as its 1,000MW Janamanjung Unit 5 is still on track for commissioning in Oct17. On the other hand, there are only 2 power plants from the independent power producers (IPPs) that will be commissioned: i) Malakoff s 1,000MW Tanjung Bin Energy coal fired plant; and ii) Petronas 400MW Pengerang gas fired plant in Jun17. Fig 4: Status of TNB s major power plant projects Power Plant Commercial Operation Date Status Capacity (MW) Type Hulu Terengganu Dec % complete 265 Hydro Connaught Bridge Dec % complete 385 Gas Ulu Jelai Mar % complete 372 Hydro Prai 1 Jan % complete 1,071 Gas Janamanjung Unit 5 1 Oct % complete 1,000 Coal Jimah East Power Dec 2019 NA 2,000 Coal Source: Affin Hwang, Company data Fig 5: TNB s current domestic generation market share 17.2% 4.5% Fig 6: TNB s domestic generation market share by 2016E 14.7% 3.9% 48.3% 51.2% 29.9% 30.3% Source: Companies, Affin Hwang TNB Malakoff Edra YTL Power Source: Companies, Affin Hwang TNB Malakoff Edra YTL Power Page 4 of 10

5 NEDA has potential to create more competition But impact on TNB not likely to be significant in short term The New Enhanced Dispatch Arrangement (NEDA) is expected to be fully implemented by 1Q16 and would introduce a new layer of competition to the power generation industry. Nonetheless, we believe the implementation of NEDA may not have a significant impact on TNB in the short term. For the existing power purchase agreements (PPAs), we believe the IPPs may not risk the visibility of their cash flows for potentially higher returns by competing for more dispatch through lowering their variable operating rates. Under NEDA, generators with existing PPAs can apply for an operating license to allow them to lower their variable operating rates (VOR), i.e. fuel costs, operation and maintenance costs, versus those stated in the PPAs. By offering lower heat rates and VOR than other power generators, the power plants would be able to compete for more dispatch, and hence, higher utilisation and revenue. Many of the power plants owned by TNB are older and thus less efficient relative to the IPPs. Younger power plants are equipped with higher labour productivity (lower workforce count/capacity), better automation (lower variable costs) and are therefore more efficient (lower heat rate). However, the average age profile of TNB s power plants would likely improve in the short term. We note there would be new incoming industry generation capacity of 3,093MW in Only 1,000MW is attributable to Malakoff s Tanjung Bin Energy plant while the remaining bulk of 2,093MW is from TNB. NEDA also allows power plants that have expired PPAs to still sell power under a competitive price-based bidding system but only the PPA of YTL Power s 404WM Pasir Gudang plant was not extended in the recent award of short-term PPA extension and thus represents a very small proportion of total industry capacity. Those that received an extension would see their extended PPAS expire only in Fig 7: New generation projects in Peninsular Malaysia Power Plant Awarded Key Owner Capacity (MW) Type Commercial Operation Date Janamanjung Unit 4 Yes TNB 1,010 Coal 31 Mar 2015 CBPS Redevelopment Yes TNB 385 Gas 1 Sep 2015 Hulu Terengganu Yes TNB 250 Hydro U1: 16 Sep 2015 U2: 17 Dec 2015 Ulu Jelai Yes TNB 372 Hydro U1: 13 Dec 2015 U2: 14 Mar 2016 Prai Yes TNB 1,071 Gas 1 Jan 2016 Tanjung Bin Energy Yes Malakoff 1,000 Coal 1 Mar 2016 Hulu Terengganu (Tembat) Yes TNB 15 Hydro U1: 15 Nov 2016 U2: 15 Dec 2016 Pengerang Co-Generation Yes Petronas 400 Gas 1 Jun 2017 Janamanjung Unit 5 Yes TNB 1,000 Coal 1 Oct 2017 Project 4A (Pasir Gudang) Yes SIPP 1,000 Gas 1 Jun 2018 Jimah East Power Yes TNB 2,000 Coal U1: 15 Jun 2019 U2 : 15 Dec 2019 Additional Chenderoh Yes TNB 12 Hydro Oct 2018 Tekai Yes TNB 156 Hydro Dec 2020 New CCGT NA NA 2,000 Gas Jan 2021 Telom Yes TNB 132 Hydro Dec 2022 New coal-fired power plant NA NA 1,000 Coal 2023 Source: Affin Hwang, Company data Page 5 of 10

6 Valuation Upgrade to BUY with revised TP of RM15.50 We upgrade TNB to BUY from Hold after raising our TP to RM15.50 (previously RM12.00). We have rolled forward our valuation to FY16 and removed the discount on TNB following the sale of Edra to CGN, which removes the overhang that TNB may not get good value for Edra s assets. We like TNB for its: 1) decent electricity-sales growth; 2) benign coal prices; and 3) earnings visibility from implementation of the imbalance cost pass through (ICPT) mechanism. Our TP translates into a target FY16E PE of 11.9x, which we deem relatively undemanding given that TNB s forward PE was within an estimated range of 13-16x prior to the gas shortage issues in FY We have fine-tuned our DCF assumptions and lowered our WACC from 8.8% to 8.1% mainly after lowering our cost of equity assumption to reflect TNB s lower risk premium. Fig 8: TNB s assumptions for WACC Risk free rate 4.0% Expected market return 8.5% Equity risk premium 6.0% Beta 0.85 Cost of equity 9.1% Equity/Capital 60.0% After-tax cost of debt 4.9% Debt/Capital 40.0% WACC 8.1% Source: Affin Hwang, Company data Risks Downside risks include: 1) overpriced acquisitions; 2) delays in implementing the ICPT mechanism; 3) lower-than-expected electricity demand growth; 4) a rise in coal prices; 5) a weaker RM; and 6) disruptions in the gas supply. Page 6 of 10

7 Tenaga FINANCIAL SUMMARY Profit & Loss Statement Key Financial Ratios and Margins FYE 31 Aug (RMm) 2014A 2015A 2016E 2017E 2018E FYE 31 Aug (RMm) 2014A 2015A 2016E 2017E 2018E Revenue 42, , , , ,981.3 Growth Operating expenses (30,080.2) (29,365.0) (31,217.1) (32,201.7) (33,167.8) Revenue (%) EBITDA 12, , , , ,813.5 EBITDA (%) Depreciation (4,872.5) (5,294.2) (5,082.9) (5,240.5) (5,335.5) Core net profit (%) EBIT 7, , , , ,478.1 Net int inc/(exp) (617.9) (662.7) (998.9) (832.3) (962.2) Profitability Associates' contribution EBITDA margin (%) Exceptional items (932.3) PBT margin (%) Pretax profit 7, , , , ,599.0 Net profit margin (%) Tax (687.9) (1,072.8) (813.6) (845.2) (859.9) Effective tax rate (%) Minority interest ROA (%) Net profit 6, , , , ,786.1 Core ROE (%) ROCE (%) Balance Sheet Statement Dividend payout ratio (%) FYE 31 Aug (RMm) 2014A 2015A 2016E 2017E 2018E Fixed assets 83, , , , ,469.8 Liquidity Other long term assets 7, , , , ,289.0 Current ratio (x) Total non-curr assets 90, , , , ,758.8 Op. cash flow (RMm) 12, , , , ,813.5 Free cashflow (RMm) , , , ,073.5 Cash and equivalents 7, , , , ,267.6 FCF/share (sen) Stocks ,010.0 Debtors 7, , , , ,118.4 Asset management Other current assets 4, , , , ,078.7 Debtors turnover (days) Total current assets 20, , , , ,474.7 Stock turnover (days) , , , ,845.7 Creditors turnover (days) Creditors 7, , , , ,075.9 Short term borrowings 2, , , , Capital structure Other current liabilities 3, , , , ,194.9 Net gearing (%) Total current liab 13, , , , ,844.8 Interest cover (x) Long term borrowings 22, , , , ,271.6 Other long term liabilities 30, , , , ,528.5 Quarterly Profit & Loss Total long term liab 53, , , , ,800.2 FYE 31 Aug (RMm) 4QFY14 1QFY15 2QFY15 3QFY15 4QFY15 Revenue 11, , , , ,744.0 Shareholders' Funds 43, , , , ,760.0 Operating expenses (9,749.6) (8,419.2) (8,037.9) (9,270.0) (9,756.3) EBITDA 3, , , , Cash Flow Statement Depreciation (1,267.4) (1,257.4) (1,239.7) (1,283.8) 1,513.3 FYE 31 Aug (RMm) 2014A 2015A 2016E 2017E 2018E EBIT 2, , , ,218.9 EBIT 7, , , , ,478.1 Int expense (235.6) (253.9) (210.3) (255.1) (225.6) Depreciation & amortisation 4, , , , ,335.5 Int and other income Working capital changes 1, ,337.4 (1,050.7) Associates' contribution Cash tax paid (687.9) (784.0) (813.6) (845.2) (859.9) Exceptional items Others (2,429.8) (3,035.8) Forex gains/(losses) (303.3) (733.5) Cashflow frm operation 10, , , , ,073.5 Pretax profit 2, , , ,412.5 Capex (10,006.5) (10,363.7) (8,000.0) (8,000.0) (7,000.0) Tax (987.8) (269.8) (231.8) 31.7 (602.9) Disposal/(purchases) Minority interest (12.2) Others (3,197.7) (2,462.6) Net profit 1, , , Cash flow frm investing (13,204.2) (12,826.3) (7,933.0) (7,620.6) (6,604.6) Core net profit 1, , , , ,408.9 Debt raised/(repaid) 2,567.6 (757.1) 8, , ,326.0 Core pretax profit 2, , , , ,000.5 Equity raised/(repaid) Net int inc/(exp) Margins (%) Dividends paid (1,410.9) (1,636.7) (1,649.4) (1,787.7) (1,938.4) EBITDA Others (1,857.9) (1,065.9) (1,211.7) (1,357.5) PBT Cash flow from financing 1,309.4 (4,251.7) 6, , ,030.0 Net profit Free Cash Flow , , , ,073.5 Source: Company, Affin Hwang forecasts Page 7 of 10

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For stocks and sectors in Malaysia covered by Affin Hwang, the following rating system is in effect: Stocks: BUY: Total return is expected to exceed +10% over a 12-month period HOLD: Total return is expected to be between -5% and +10% over a 12-month period SELL: Total return is expected to be below -5% over a 12-month period NOT RATED: Affin Hwang Investment Bank Berhad does not provide research coverage or rating for this company. Report is intended as information only and not as a recommendation Sectors: OVERWEIGHT: Industry, as defined by the analyst s coverage universe, is expected to outperform the KLCI benchmark over the next 12 months NEUTRAL: Industry, as defined by the analyst s coverage universe, is expected to perform inline with the KLCI benchmark over the next 12 months UNDERWEIGHT: Industry, as defined by the analyst s coverage universe is expected to under-perform the KLCI benchmark over the next 12 months Conflict of Interest Disclosure Ownership of Securities For Ownership of Securities information, please visit BlueMatrix disclosure Link at Investment Banking Relationships For Investment Banking Relationship, please visit BlueMatrix disclosure Link at Page 9 of 10

10 Relevant Relationships Affin Hwang may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage. Affin Hwang market making Affin Hwang may from time to time make a market in securities covered by this research. Additional information may be available upon request. Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.) If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. In some cases, we may also charge a maximum of 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a nonresident of Japan. For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements. There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc. When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Investment Advisers Association Type II Financial Instruments Firms Association Page 10 of 10