28 October 2016 4QFY16 Result Review Tenaga Nasional Berhad Solid finish Maintain BUY Unchanged (TP): RM16.80 Tenaga s 4QFY16 beat estimates Volumes remained steady but average tariffs lower Our forecasts remain unchanged despite outperformance given inflated base in FY16 Reaffirm BUY at unchanged DCF-derived target price of RM16.80/share A solid FY16. Tenaga s results came in ahead of expectations. The group reported core net profit of RM1.88b for its 4QFY16, which brought core FY16 earnings to RM7.76b. This accounted for 111% of our estimate and 107% of consensus. A final dividend of 22sen was proposed, bringing full year dividends to 32sen (+10%yoy). Volumes remained steady. Volume in 4QFY16 was flat against the 3QFY16 (+0.4%qoq), which was a positive surprise as we had earlier expected demand in 4Q to moderate we suspect this was partly due to spill over billing from end 3QFY16 (when demand was still strong). On a year-on-year basis, volume growth moderated to 2.7% in 4QFY16 (from 7.5%yoy in 3QFY16). Average tariffs inflated last quarter. Revenues were slightly down sequentially (-0.7%qoq) as average tariffs achieved were lower (- 1.1%qoq). The 3QFY16 involved numerous peak demands which brought consumers into higher tariff bands whereas demand this quarter was more even. As a result, EBITDA margins also moderated to 32% from the high of 35% in 3QFY16. Capex to pick-up. Capex is expected to pick up in FY17, i.e. around RM6-7b for T&D (vs. an average RM5-6b in the past 3 years) and another RM3-4b for generation capex to be channelled mainly for Manjung 5 (1000MW coal plant) and Jimah East (2000MW coal plant). This will see Tenaga s capex (for T&D) catches up with IBR assumptions of an average RM5.8b/annum. Built in a conservative FY17F. We have built in conservative electricity growth assumption for FY17F at 2.2% considering that FY16 demand was inflated by the temporary heatwave between Feb 2016 and Jun 2016. Our FY17F/18F numbers remain unchanged for now. RETURN STATS Price (27 October 2016) Target Price Expected Share Price Return RM14.32 RM16.80 +17.3% Expected Dividend Yield +4.0% Expected Total Return +21.3% STOCK INFO KLCI 1,642.21 Bursa / Bloomberg Board / Sector Syariah Compliant 5347/TNB MK Main Yes Issued shares (mil) 5643.6 Par Value (RM) 1.00 Market cap. (RM m) 81,381 Price over NA 1.61 52-wk price Range RM10.2 - RM16.9 Beta (against KLCI) 1.17 3-mth Avg Daily Vol 12.1m 3-mth Avg Daily Value Major Shareholders (%) RM153.m Khazanah Nasional 29.7% EPF 15.3% Skim ASN 7.5% MIDF RESEARCH is a unit of MIDF AMANAH INVESTMENT BANK Kindly refer to the last page of this publication for important disclosures
INVESTMENT STATISTICS FYE Aug FY14 FY15 FY16 FY17F FY18F Revenue (RM m) 42,792.4 43,286.8 44,531.5 47,891.8 50,457.1 EBIT (RM'm) 7,629.9 7,695.3 9,072.0 8,636.9 9,044.1 Pre-tax Profit (RM m) 7,114.7 7,133.7 8,456.8 8,043.2 8,443.3 Core net profit (RM'm) 4,682.5 5,978.9 7,757.6 7,152.5 6,708.5 FD EPS (sen) 83.0 105.9 137.5 126.7 118.9 EPS growth (%) (13.7) 27.7 29.7 (7.8) (6.2) PER (x) 17.3 13.5 10.4 11.3 12.0 Net Dividend (sen) 29.0 29.0 32.0 57.0 53.5 Net Dividend Yield (%) 2.0 2.0 2.2 4.0 3.7 Source: Company, MIDFR Unlocking Tenaga s balance sheet potential. Our conviction on Tenaga is premised on balance sheet value unlocking (Tenaga is one of the most underleveraged utility company in the region entailing just 0.3x net gearing) which could mean higher dividends and overseas expansion. Management maintained its target for a capital optimisation exercise by year end, i.e. two studies are currently being undertaken one on the former and another on a 10-year business strategic direction of the group, which we expect to emphasize on Tenaga s regional footprint expansion. Tenaga s FCF yield currently stands at up to 6%-7% vs. dividend yields of just 2.2% (FY16) which suggests potential for a meaningful increase. Meanwhile, the group also recently established USD2.5b Sukuk facility to fund on-going and future potential overseas expansion. EXHIBIT 1: TENAGA AMONG MOST UNDERGEARED UTILITY COMPANY IN REGION (NET GEARING, %) Source: Bloomberg, Company, MIDFR 2
Recommendation. We reaffirm our BUY call on Tenaga at unchanged DCF-based TP of 16.80/share. We like Tenaga for: (1) Strong earnings visibility post-icpt implementation, (2) Dividend catalyst on the back of FCF yield of ~7% over FY16F/17F, relatively under-geared balance sheet at 0.35x and the upcoming capital optimisation exercise, and (3) Overseas expansion provides scope for stronger growth in the mid-term. Capital management and the resolution of its RM2b tax issue with the Inland Revenue Board are key catalysts over the next 12 months. 4% dividend yield looks attractive. EXHIBIT 2: TENAGA FY16 RESULT SUMMARY FYE 31 August (RMm) 4Q15 3Q16 4Q16 YoY QoQ FY15 FY16 YTD Revenue 11,744 12,129 11,237-4.3% -7.4% 43,286.8 44,531.5 2.9% EBITDA 3,732 4,215 3,602-3.5% -14.6% 13,921.8 14,794.2 6.3% Depreciation (1,513.3) (1,468. 0) (1,516.3) 0.2% 3.3% (5,294.2) (5,722.2) 8.1% EBIT 2,218.9 2,747.1 2,085.4-6.0% -24.1% 8,627.6 9,072.0 5.2% Net interest expense (91.5) (231.0) (130.1) 42.2% -43.7% (662.7) (740.3) 11.7% Translation gain/(loss) (733.5) (39.8) (114.8) -84.3% 188.4% (819.3) (390.0) -52.4% Associates/JVs 44.5 25.4 24.6-44.7% -3.1% 101.1 93.3-7.7% Pretax (pre-forex) 2,146.0 2,571.6 1,987.1-7.4% -22.7% 7,953.0 8,456.8 6.3% Tax (602.9) (224.6) (135.9) -77.5% -39.5% (1,072.8) (746.0) -30.5% Minority Interest (11.3) (1.5) (25.8) 128.3% 1620.0% (57.5) (46.8) -18.6% Reported net profit 820.9 2,308.7 1,762.2 114.7% -23.7% 6,118.4 7,367.6 20.4% Core net profit 1,554 2349 1,877 20.8% -20% 5,592.5 7,757.6 38.7% EPS (sen) 14.5 40.9 31.2 114.7% -23.7% 108.4 130.5 20.4% Core EPS (sen) 27.5 41.6 33.3 20.8% -20% 99.1 137.5 38.7% DPS (sen) 19.00-22.00 15.8% NA 29.00 32.00 10.3% EBITDA margin 31.8% 34.8% 32.1% 32.2% 33.2% EBIT margin 18.9% 22.6% 18.6% 19.9% 20.4% Pretax margin 18.3% 21.2% 17.7% 18.4% 19.0% Tax rate -28.1% -8.7% -6.8% -13.5% -8.8% Core net profit margin 13.2% 19.4% 16.7% 12.9% 17.4% 3
Unit Revenue/Cost Analysis 4QFY15 3QFY16 4QFY16 YoY QoQ Average tariff achieved for TNB sale (sen/kwh) 39.72 40.06 39.60-0.3% -1.1% Volume (GWh) 26,974 27,602 27,709 2.7% 0.4% Unit Revenue (RM/kwh) 0.3972 0.4006 0.3960-0.3% -1.1% Unit Cost (RM/kwH) - Total cost 0.362 0.347 0.338-6.7% -2.6% Unit Cost (RM/kwH) - IPP & TNB Fuels 0.219 0.196 0.199-9.2% 1.6% Unit Cost (RM/kwH) - Repair & maintenance 0.026 0.018 0.024-10.1% 27.5% Unit Cost (RM/kwH) - General expenses 0.016 0.035 0.018 12.1% -49.9% Unit Cost (RM/kwH) - Staff cost 0.033 0.035 0.045 35.5% 28.5% Gross Electricity Sale Revenue (RMm): 11,304.0 11,621.3 11,542.2 2.1% -0.7% TNB 10,714.8 11,056.4 10,972.6 2.4% -0.8% EGAT (1.9) - 1.5 NA NA SESB 445.6 451.9 449.3 0.8% -0.6% LPL 145.5 113.0 118.8-18.4% 5.1% Generation Mix 4QFY16 (%) 3QFY16 (%) 4QFY15 (%) Variance (%) YoY Gas & LNG 38.9 39.9 51.0 (12.1) Coal 57.0 56.2 44.1 12.9 Distillate 0.1 0.1 0.2 (0.1) Oil 0.5 0.6 0.4 0.1 Hydro 3.5 3.2 4.2 (0.8) Fuel Cost Composition 4QFY16 (%) 3QFY16 (%) 4QFY15 (%) Variance (%) YoY Gas & LNG 57.2 59.1 64.8 (7.7) Coal 41.0 39.0 32.5 8.5 Distillate 0.6 0.4 1.3 (0.7) Oil 1.1 1.5 1.3 (0.1) Cost Analysis (RMm) 4QFY15 3QFY16 4QFY16 YoY QoQ IPP purchase cost 3,325.3 3,084.5 3,376.8 1.5% 9.5% - Capacity payment 920.5 1,023.1 1,416.6 53.9% 38.5% - Energy payment 2,404.8 2,061.5 1,960.2-18.5% -4.9% Fuel costs 2,577.9 2,312.3 2,128.9-17.4% -7.9% Repair & Maintenance 705.4 509.2 651.7-7.6% 28.0% Staff cost 897.6 968.9 1,249.7 39.2% 29.0% TNB General Expenses 421.5 964.7 485.2 15.1% -49.7% Subs. COS & Opex 315.3 262.3 (54.0) -117.1% -120.6% Depreciation & Amortisation 1,513.3 1,468.0 1,516.3 0.2% 3.3% Total 9,756.3 9,569.9 9,354.6-4.1% -2.2% Source: Company, MIDFR 4
DAILY PRICE CHART Hafriz Hezry hafriz.hezry@midf.com.my 03-2173 8392 Source: Bloomberg, MIDFR 5
MIDF RESEARCH is part of MIDF Amanah Investment Bank Berhad (23878 - X). (Bank Pelaburan) (A Participating Organisation of Bursa Malaysia Securities Berhad) DISCLOSURES AND DISCLAIMER This report has been prepared by MIDF AMANAH INVESTMENT BANK BERHAD (23878-X). It is for distribution only under such circumstances as may be permitted by applicable law. Readers should be fully aware that this report is for information purposes only. The opinions contained in this report are based on information obtained or derived from sources that we believe are reliable. MIDF AMANAH INVESTMENT BANK BERHAD makes no representation or warranty, expressed or implied, as to the accuracy, completeness or reliability of the information contained therein and it should not be relied upon as such. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. All opinions and estimates are subject to change without notice. The research analysts will initiate, update and cease coverage solely at the discretion of MIDF AMANAH INVESTMENT BANK BERHAD. The directors, employees and representatives of MIDF AMANAH INVESTMENT BANK BERHAD may have interest in any of the securities mentioned and may benefit from the information herein. Members of the MIDF Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein This document may not be reproduced, distributed or published in any form or for any purpose. MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS STOCK RECOMMENDATIONS BUY TRADING BUY NEUTRAL SELL TRADING SELL Total return is expected to be >15% over the next 12 months. Stock price is expected to rise by >15% within 3-months after a Trading Buy rating has been assigned due to positive newsflow. Total return is expected to be between -15% and +15% over the next 12 months. Total return is expected to be <-15% over the next 12 months. Stock price is expected to fall by >15% within 3-months after a Trading Sell rating has been assigned due to negative newsflow. SECTOR RECOMMENDATIONS POSITIVE NEUTRAL NEGATIVE The sector is expected to outperform the overall market over the next 12 months. The sector is to perform in line with the overall market over the next 12 months. The sector is expected to underperform the overall market over the next 12 months. 6