MARC has affirmed Tenaga Nasional Berhad’s (TNB) issuer rating of AAA and sukuk rating of AAA_IS on TNB’s RM2.0 billion Al-Bai’ Bithaman Ajil Islamic Financing Bonds (sukuk). The ratings outlook is stable. 

The ratings incorporate a two-notch rating uplift based on MARC's assessment of a high likelihood of government support given TNB’s critical role as the country’s principal energy provider. On a standalone basis, TNB’s credit strength lies in its continued monopoly in 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 rating agency also notes that the internal re-organisation of TNB is on track. The transfer of assets to TNB Power Generation Sdn Bhd (Genco) was 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, arising mainly from the imposition of the movement control order (MCO) between March and 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). Its OPBITDA margin, however, has remained resilient at 40.9% (9M2019: 36.8%), supported by an imbalance cost pass-through (ICPT) mechanism. Cash flow from operations (CFO) was lower at RM10.7 billion (9M2019: RM14.1 billion) partly due to 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 of September 30, 2020, even after a dividend payment of RM4.0 billion which included a special dividend of RM2.8 billion for 2019. Debt-to-equity (DE) ratio rose to 0.92x (2019: 0.77x) mainly due to issuance of 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. 

The stable outlook reflects MARC’s expectation that TNB will broadly maintain its credit profile in the current challenging environment and that the group will adhere to prudent financial management.

Lee Chi Han, +603-2717 2939/ chihan@marc.com.my; 

Sharidan Salleh, +603-2717 2954/ sharidan@marc.com.my.