Published on 01 Apr 2020.
RAM Ratings has reaffirmed the AAA/Stable rating of Tenaga Nasional Berhad’s (TNB or the Group) RM5 bil Islamic MTN Sukuk Wakalah Programme (2017/2067) (Sukuk Wakalah). The reaffirmation is premised on the Group’s strategic position as Malaysia’s national electricity company as well as its resilient operating and financial performance. Based on RAM’s rating methodology for government-linked entities, TNB is highly likely to receive extraordinary government support in the event of financial distress, in view of the Group’s critical role in the Malaysian power sector and its very strong relationship with the Government of Malaysia (GoM).
Besides its near-monopoly over the transmission and distribution (T&D) of electricity across Peninsular Malaysia and Sabah, TNB also controlled 51.4% of the peninsula’s generating capacity as at end-December 2019. The Group further plays a crucial function as the sole off-taker of generating capacity and electrical energy produced by independent power producers (IPPs) in Peninsular Malaysia (via Single Buyer – a ring-fenced entity owned by TNB).
Despite the roll-out of Malaysian Electricity Supply Industry 2.0 reforms, we expect TNB to remain as the dominant player given its laudable operating track record and ownership of the capital-intensive grid business. The GoM, apart from possessing a 67% stake in TNB through its various agencies, also holds a special share in the Group.
We maintain a positive view of the Incentive-Based Regulation (IBR) framework as it provides TNB with stable returns in each three-year regulatory period (RP), in addition to an established imbalance cost pass-through mechanism. Any movement in fuel and other generation-specific expenses will be adjusted to its tariffs bi-annually, as evident from the current surcharge of 2.00 sen/kWh on tariffs for non-household customers in 1H 2020.
Although TNB could, in the long run, be subjected to lower allowable returns and more stringent requirements in respect of its regulated business, the IBR provides earnings certainty within each RP and enables the Group to retain efficiency savings if it outperforms regulatory assumptions. Meanwhile, TNB has submitted a proposal for the Energy Commission’s review in preparation for the upcoming RP3 (2021-2023). Details are expected to be announced by end-2020.
Against relatively stable revenue of RM50.9 bil, TNB’s net profit advanced 18.7% to RM4.5 bil in FY Dec 2019, primarily due to significantly lower impairment costs relating to its overseas portfolio. Total impairments came up to RM0.3 bil in FY Dec 2019 compared to RM1.1 bil the previous year, underscored by a turnaround in the performance of almost all of the Group’s overseas assets.
TNB is currently rebalancing its international businesses, with acquisition of the remaining 20% stakes in GVO Wind Ltd and Bluemerang Capital Ltd in the United Kingdom, a debt restructuring for GAMA Enerji A.S. in Turkey, and asset monetisation exercise for GMR Energy Ltd in India. Overall, contributions from the Group’s overseas segment stayed minimal at 3.4% of its total revenue in fiscal 2019.
As at end-FY Dec 2019, TNB’s total debt including lease liabilities (post-MFRS 16 - Leases) had increased to RM77.0 bil (end-FY Dec 2018: RM71.8 bil). Even so, the Group’s debt coverage and leverage profiles remained healthy, with its OPBDIT debt coverage (a proxy to its FFO debt coverage) and gearing ratios coming in at a respective 0.23 and 1.30 times as at end-December 2019 (end-December 2018: 0.23 and 1.22 times).
TNB declared a record dividend of RM5.7 bil for FY Dec 2019 (+87.9% y-o-y, with RM4.0 bil yet to be paid). This, coupled with its exposure to a disputed tax bill pertaining to reinvestment allowances, may significantly erode the Group’s cash reserves. Nevertheless, we opine that the Group still has some headroom for additional borrowings should the need arise. After considering a heftier capex commitment in 2020, our stressed cashflow analysis assumes an additional debt of RM5 bil, lower electricity sales and higher operating expenses this year. Although this would weaken TNB’s FFO debt coverage and gearing to a respective 0.22 times and 1.41 times, the ratios remain within our rating thresholds.
Recently, the GoM announced discounts on monthly electricity bills for six months (from April to September 2020). These will be applicable to household (2%-50%), sectors severely affected by the COVID-19 pandemic (15%), as well as commercial, industrial and agricultural customers (2%). That said, the financial impact to TNB is deemed minimal as the tariff reductions (estimated at RM1 bil in total) will be largely subsidised by the Kumpulan Wang Industri Elektrik fund.
Chu Jia Ying
(603) 3385 2519
(603) 3385 2577
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