CREDIT ANALYSIS REPORT

TENAGA NASIONAL BERHAD - 2020

Report ID 605376 Popularity 529 views 34 downloads 
Report Date Jan 2021 Product  
Company / Issuer Tenaga Nasional Bhd Sector Infrastructure & Utilities - Power
Price (RM)
Normal: RM500.00        
  Add to Cart
Rationale
MARC has affirmed Tenaga Nasional Berhad’s (TNB) issuer rating at AAA and the sukuk rating on TNB’s outstanding RM2.0 billion Al-Bai’ Bithaman Ajil Islamic Financing Bonds (sukuk) at AAAIS with a stable outlook.

The affirmed ratings incorporate a two-notch rating uplift based on MARC's assessment of a high likelihood of government support given its critical role as the country’s principal energy provider. On a standalone basis, TNB’s credit strength lies in its continued monopoly of electricity transmission and distribution (T&D) in Peninsular Malaysia and Sabah, its significant electricity generation capacity of 14,590MW and its strong operational track record. The credit strength is tempered by the potential ceding of some market share in electricity sales upon full implementation of the Malaysian Electricity Supply Industry 2.0 (MESI 2.0) framework.

The rating agency notes that the internal reorganisation of TNB is on track with the transfer of assets to TNB Power Generation Sdn Bhd (GenCo) completed on October 1, 2020 while the transfer of assets to TNB Retail Sdn Bhd (RetailCo) is expected to be completed in January 2021. In MARC’s view, the reorganisation does not have any material impact on TNB’s credit profile as the key T&D businesses will remain with TNB at the holding company level while the transfer of assets will be held under wholly-owned subsidiaries.

For 9M2020, TNB’s electricity demand fell by 6.2% y-o-y in Peninsular Malaysia mainly due to lower consumption by industrial and commercial sectors arising from the imposition of the movement control order (MCO) between March to May 2020. Notwithstanding this, TNB’s revenue cap businesses (T&D network, single buyer and grid system operations) remain insulated from demand risk under the Incentive-Based Regulation (IBR) framework. In 9M2020, there was a regulatory adjustment of RM533.3 million to reinstate the revenue of these businesses based on the revenue target under the IBR for the current regulatory period. 

Profitability was affected by higher finance cost and depreciation related to TNB’s newly commissioned power plant, Jimah East Power, which led to a lower net profit of RM2,414.6 million (9M2019: RM3,860.9 million). However, TNB’s OPBITDA margin has been resilient at 40.9% (9M2019: 36.8%) supported by an imbalance cost pass through (ICPT) mechanism under which any change in fuel costs is passed to customers. CFO was lower at RM10.7 billion (9M2019: RM14.1 billion) partly due to the slower collection during the restricted movement period. This is likely to persist over the near term given the ongoing financial pressures on households and businesses arising from the pandemic. Liquidity remains healthy with cash and cash equivalents standing at RM6.9 billion as at September 30, 2020, even after a dividend payment of RM4.0 billion which includes a special dividend of RM2.8 billion for 2019. 

As at end-September 2020, the debt-to-equity (DE) ratio increased to 0.92x (2019: 0.77x) mainly due to the issuance of an additional RM4.0 billion in debt and trade lines as well as lower shareholders’ funds after the payment of the special dividend. MARC understands that the increased borrowings were intended to achieve optimal capital structure to align with the IBR mechanism. Under the IBR, the assumed gearing for the purpose of determining regulated returns is 55% of the total capital (equivalent to 1.2x DE) which indicates that TNB’s leverage position could increase further from the current level. MARC understands that the RM2.0 billion rated sukuk maturing in December 2021 is expected to be repaid from internally generated funds.

The stable outlook reflects MARC’s expectation that TNB’s business profile will be broadly maintained in the current economic situation and that the group will adhere to prudent financial management, particularly in maintaining its DE below 1.0x without triggering pressure on its standalone rating profile.

Major Rating Factors

Strengths
High likelihood of government support; and
Largest power transmission and distribution utility group in Malaysia. 

Challenge/Risk
Increased competition in retailing from industry liberalisation.

Related