KUALA LUMPUR (Oct 24): Tenaga Nasional Bhd (KL:TENAGA) is undervalued with its shares having fully priced in the worst outcome of its RM10 billion tax disputes, said its most bullish analyst.
The past four months’ decline wiped out RM10.4 billion from its market value, a sign that investors are treating the national electric utility’s massive tax liability as fully unrecoverable, according to CGS International. The selldown has also made TNB, as the company is known, cheaper than regional peers, the research house noted.
“We believe a favourable settlement at the lower end of the market’s current expectations would trigger a meaningful rerating,” the house said.
CGS International has the stock on ‘add’ with a target price of RM18, the highest among 22 research houses covering the stock.
Shares of TNB have fallen 12% since the start of July amid fears of hefty provisions that will hurt its finances from a slew of additional tax bills.
A large majority of analysts, however, remained positive on the stock with 19 ‘buy’, three ‘hold’, and no ‘sell’ calls. The consensus’ target price is RM16.05, according to the average of analysts tracked by Bloomberg, implying potential upside of 22% from the current price.
Even if the entire RM10 billion tax liability is realised, CGS International said its target price of RM16.77, which account for outstanding cash outflows, would still be about 28% higher than the current price.
That underscores the stock’s “inherent value with the market underappreciating the earnings upside potential” from higher approved capital expenditure for the next five years and a potential turnaround at its generation unit, the house said.
The stock currently trades at six times its adjusted enterprise valuation, below its 10-year mean and regional power sector peers’ multiple of between 9.4 and 14.2 times, the house noted.
The company’s “arguably stronger earnings mix, with more than 70% coming from its highly predictable transmission and distribution business, coupled with structural changes in the domestic energy landscape…should not warrant such a discount”, CGS International added.