Published on 28 Jul 2023.
RAM Ratings has affirmed the AAA/Stable/P1 ratings of Tenaga Nasional Berhad’s (TNB or the Group) sukuk programmes (see table).
The ratings reflect TNB’s strategic position as Malaysia’s national electric utility and its resilient operating and financial performance. The Group enjoys a near monopoly over power transmission and distribution, owning 57% of the total installed capacity in Peninsular Malaysia as at end-December 2022. TNB is also the sole offtaker of energy generated by independent power producers in the peninsula via Single Buyer – a ring-fenced entity owned by the Group.
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. This view is premised on the Group’s critical role in the Malaysian power sector and its strong relationship with the Government of Malaysia.
Although fuel prices trended significantly higher last year, the Group benefited from an established imbalance cost-pass through (ICPT) mechanism under the Incentive-Based Regulation framework that helps safeguard its earnings. In FY Dec 2022, revenue (including ICPT recovery) and operating profit before depreciation, interest and tax (OPBDIT) jumped 39% and 8% to RM73.18 bil and RM19.87 bil, respectively. Stronger electricity demand, a lofty positive ICPT adjustment and a lower allowance for doubtful debt more than offset heftier operating expenses from a surge in the prices of fuel used for power generation. TNB’s revenue for 1Q fiscal 2023 grew 4% y-o-y to RM16.26 bil, driven by improved electricity demand. Higher expenses for repair and maintenance activities pushed OPBDIT down 6% y-o-y to RM4.67 bil but net profit came in higher at RM930.9 mil on the back of lower tax provisions (1Q fiscal 2022: RM871.2 mil).
The timing mismatch between upfront fuel payment made by TNB and the recovery of surcharges however exerted liquidity pressure on the Group. As at end-March 2023, total receivables nearly doubled to RM19.66 bil (end-December 2021: RM10.55 bil), necessitating a drawdown of additional borrowings for working capital needs and capital expenditure. The heavier debt load of RM97.09 bil, including lease liabilities, increased TNB’s gearing to 1.61 times as at the same date (end-December 2021: RM81.12 bil and 1.39 times). Funds from operations debt coverage and operating cashflow debt coverage fell to a respective 0.20 times and 0.10 times in FY Dec 2022 (FY Dec 2021: 0.25 times and 0.16 times) before the latter improved to an annualised 0.18 times in 1Q fiscal 2023.
We view the weaker ratios to be temporary, considering easing fuel prices and the eventual collection of ICPT recovery. TNB had fully recovered the total RM10.4 bil of ICPT cost recovery from the government for the period of January to June 2023. Compelled to grow its renewable power capacities to fulfil its energy transition commitments, TNB plans to venture into new markets like South Korea, Taiwan and Australia. Given its inherently leveraged balance sheet due to the capital-intensive nature of its business, we expect TNB to exercise prudence in overseas acquisitions to maintain the stability of its overall performance and sustain credit metrics at levels that are commensurate with its ratings. Overseas investments currently contribute less than 1% of the Group’s revenue.
Liew Kar Ling
(603) 3385 2586
Chong Van Nee, CFA
(603) 3385 2482
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Ratings on Tenaga Nasional Berhad