KUALA LUMPUR (Sept 1): Rising fuel costs and persistent populist measures by the government to maintain electricity subsidies have raised concerns among anaysts on the prospects of Tenaga Nasional Bhd (TNB), as reflected in the increasing number of “sell” calls on the stock.
Of the 20 analysts currently covering the stock, nine have “buy” recommendations for the stock, another five have issued “hold” calls, while the remaining six have made “sell” calls. Their target price for TNB ranges from RM6.60 to RM19.60, for a consensus target price of RM10.18.
Although researchers with “buy” calls still constitute the largest composition among the research houses polled by Bloomberg’s consensus rating, their percentage has shrunk to 45% from 65% in January, and from 85% in September last year.
In contrast, analysts with “sell” ratings rose 30% after TNB’s recent release of its financial report for the second quarter ended June 30, 2022 (2QFY22), which showed receivables at a record high of RM19.17 billion — from RM14.2 billion in 1QFY22 and RM10.7 billion in 4QFY22 — mainly due to the continuous surge in fuel generation costs.
Analysts with a “hold” rating on TNB constituted 25% of the consensus, unchanged from January but up from 5% from September last year.
The rise in “sell” advocates appear to be in line with rising fuel costs, particularly coal, which constitutes 57.8% of the industry generation mix as at 2QFY22.
Year-to-date, Newcastle spot coal prices have jumped by almost three times to US$425 per tonne, from US$151.75 at the beginning of the year.
The elevated coal prices, coupled with the government’s intention to maintain electricity tariff for the general public, has resulted in a lag effect for TNB to recover higher fuel cost through the Imbalance Cost Pass-Through (ICPT) mechanism.
UOB Kay Hian analyst Chong Lee Len said Putrajaya’s move to provide TNB a RM6 billion guarantee to ensure electricity generation operation is not disrupted is a way to “utilise” the utility giant’s balance sheet to undertake electricity tariff subsidies for Malaysians.
“We expect coal prices to remain stubbornly elevated as we enter the wintering period. While this is a good off-balance sheet financing option for the government, TNB’s investability and autonomy as a purely profit-driven entity with a resemblance of decent corporate governance could be at risk,” she said in a note on Thursday (Sept 1), adding that UOB remains cautious on the stock.
Chong kept her “sell” recommenation with a target price of RM6.60, as she remains cautious on TNB’s bid to seek the existing RM5.8 billion ICPT surcharge from the government, and possibly another RM6 billion under-recovery for the first half of next year’s tariff review.
Nomura’s Ahmad Maghfur Usman highlighted that while TNB’s net gearing stood healthy at 40.1% as at 2QFY22 versus 39.7% in 1QFY22, high receivables have weighed on the group’s working capital.
“As a consequence, cash flow generation remains weak, at a mere RM780 million in 2QFY22, versus RM3.4 billion in previous corresponding quarter and RM1.1 billion in 1QFY22,” he said in a note on Tuesday (Aug 30).
“Suspension or adjustment to ICPT mechanism is a key downside risk,” said the analyst, who kept his “neutral” rating and RM9.00 target price.
Nonetheless, TA Securities analyst Kylie Chan Sze Zan is of the view that it is reasonable to expect the government to pay TNB its due ICPT receivables.
“This is integral to instill confidence among foreign investors, and also enforce the integrity of legal frameworks in the country,” she said in a note on Thursday (Sept 1), keeping her “buy” call on TNB with a target price of RM10.70.
Hong Leong Investment Bank analyst Daniel Wong agreed that the government would continue honouring the ICPT mechanism, but cautioned that TNB’s cash flow is expected to be dragged down in the near term due to the ongoing mismatch from fuel cost pass-through.
“There was time lag effect of the approved imbalance cost pass-through of only RM7 billion in 2HFY22, as compared to RM9.4 billion imbalance cost pass-through recognised in 1HFY22 and the deferred RM2.4 billion from 2HFY21,” he said, while keeping his “buy” call and RM11.65 target price.
Kenanga Research analyst Teh Kian Yeong, meanwhile, said he is unperturbed by the seemingly ballooning under-recovery of fuel costs, as it will eventually be recovered under the incentive-based regulatory (IBR) framework.
Having said that, Teh cut his target price on the stock to RM10.17 from RM10.27, as he reduced the net profit forecast to take into account of higher-than-estimated prosperity tax and timing difference between the actual fuel costs incurred versus the amount entitled under the ICPT mechanism.
“We remain optimistic on Tenaga, given that Cukai Makmur is one-off in FY22, while skyrocketing fuel costs is pass through with lag effect, which is mainly accounting treatment in the immediate term,” said the analyst, who maintained an “outperform” rating on the stock.
It remains to be seen to what extent the government — which recently requested Petroliam Nasional Bhd (Petronas) to double dividend payout — is willing to sustain the credibility of ICPT mechanism, as coal prices stay elevated in a protracted period, especially after the upcoming 15th General Election.