Stable earning for TNB, but Covid-19 reduces power demand

TNB might get an indirect impact in terms of tourism which is less business, for example, less usage of light and air conditioners at hotels


EARNINGS of Tenaga Nasional Bhd (TNB) for the financial year 2019 (FY19) and FY20 is expected to be stable on the back of steady growth in power demand and incentive-based regulation (IBR)/imbalance cost pass-through (ICPT) mechanisms protecting the sector from the fluctuations in fuel prices.

Hong Leong Investment Bank Bhd analyst Daniel Wong expects the national utility company to likely face indirect impact from the coronavirus outbreak which is set to impact the hospitality industry.

“As the country faces the impact of coronavirus in China, TNB might get an indirect impact in terms of tourism which is less business. The usage of light and air conditioners at hotels and Airbnb accommodations will be lower,” he told The Malaysian Reserve.

For the third quarter ended Sept 30, 2019 (3Q19), TNB saw its profit more than double to RM1.2 billion from the RM501 million recorded in the corresponding quarter last year.

The jump was largely contributed by the lower operating expenses which dropped 9% year-on-year at RM10.65 billion, while fuel cost was significantly lower during the quarter.

Wong pointed out that, while TNB’s transmission and distribution segment is protected under IBR and ICPT mechanisms, its power generation segment is subject to future risks of pricing and take-up rate under the auction mechanism of Malaysia Electricity Supply Industry 2.0.

“We remain positive on the ICPT implementation, as TNB will be able to recoup its higher fuel generation costs of RM376.45 million incurred in the second half of 2019 (2H19), as well as the hike in piped gas price in 1H20,” said Wong.

The utility company recorded a lower net profit for FY18 at RM3.75 billion compared to RM6.91 billion in FY17, mainly due to regulatory adjustment as a result of regulatory changes in the Second Regulatory Period (2018-2020), impairment and foreign exchange translation.

Shares in TNB closed 1.42% or 18 sen lower at RM12.50 yesterday, giving it a market capitalisation of RM71.09 billion. Hong Leong maintained its ‘Hold’ call on TNB with a target price of RM13.50.

In aspiring for 20% of the country’s power generation capacity from renewable energy (RE) by 2025, the Ministry of Energy, Science, Technology, Environment and Climate Change has continued to focus on renewable projects.

“Large power generation companies including TNB would be negatively affected by the government’s aspiration towards RE, as they face increasing risk of capacity replacement as each large scale solar (LSS) capacity is only up to power purchase agreements, while each player is only allowed to bid up to three LSS for every tender programme.

“Furthermore, there are an increasing number of participations (including non-conventional power companies) in LSS projects given the lower capital upfront requirement, easy operation and maintenance and no fuel requirements. Therefore, existing power generation companies are likely to face increasing competition with lower rates of returns,” Wong said.