Regulatory Risk Remains Elevated For TNB

Tenaga in its 9 month earnings report came in within expectation of MIDF, the utility giant reported a core net profit of RM1.30b for the 3Q22, which brought 9M22 core earnings to RM3.26b (excluding forex translation loss of RM608m), making up 76% and 71% of consensus FY22 estimates respectively.

Margins improved sequentially, however revenue was largely flattish sequentially owing to flattish demand growth in the period. However, 3Q22 EBITDA improved sequentially (+5.5%qoq) due to lower generation cost (-5%qoq), driven by higher hydro generation – hydro made up 6.3% generation mix vs. just 3.4% in 2Q22. This was partly offset by a +47%qoq increase in repair & maintenance cost to RM792m during the quarter.

The ICPT under-recovery in the 3Q22 stood at RM6.1b and remains elevated said the research house. Tenaga has recovered RM4.9b from the Government out of a total subsidy commitment of RM5.8b by year-end. However, receivables continued to rise given still high fuel prices. MIDF expects the receivables to climb further in 4Q22 before a decision on the ICPT is taken by the Government.

While the house kpeeps its Neutral call on the stock, cash flow constraints from deep cost under recovery might depress dividend payout to the lower end of Tenaga’s 30%-60% payout policy, which reduces the attractiveness of the stock in the near-term amid rising interest rates. Meanwhile, a Government with a weak majority could reduce the political muscle to push a sizeable fuel cost pass-through, suggesting still high regulatory risk for Tenaga.

On the decarbonisation front, MIDF likes Tenaga’s long-term initiatives, but see near-to-mid-term ‘transition pain’ to endure in earnings impact from early coal plant retirement and stake dilution from CCUS incorporation and Cost impact from potential carbon pricing introduction.

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