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PETALING JAYA: A special dividend could be in store for Tenaga Nasional Bhd’s (TNB) shareholders, says UOB Kay Hian Research (UOBKH).

The research house is assuming an 8% dividend yield for TNB, as it thinks the company can match its previous year’s RM1 per share net dividend per share.

“TNB’s balance sheet remained healthy with a cash pile of RM16bil as at March 31.

“All in all, we project the utility sector’s net profit of RM6.44bil (+6.5% year-on-year or y-o-y) for 2020 and RM6.51bil (+1.2% y-o-y) for 2021 to be driven by a 5% y-o-y increase in regulatory asset value for TNB, ” UOBKH said.

The annual electricity demand is anchored at 1.8%-2.0% for TNB in the years 2018 to 2020, it said.

“This is the baseline regulator’s demand projection, and in the event electricity demand comes in below expectations, TNB is guaranteed a revenue stream based on this 1.8%-2.0% projection, ” it said.

TNB is also expected to be driven by the positive regional associate earnings contribution, it added.

“Stepping into the second-half of the year, we expect the government to remain committed to energy reforms and this will ensure that TNB and Gas Malaysia Bhd (GMB) will continue to offer good earnings visibility under the incentive-based regulation framework, ” it said.

UOBKH has upgraded the utility sector, rating it on good earnings visibility and an attractive dividend yield of 8% and 7% for TNB and Malakoff Corp Bhd respectively.

It also noted that TNB was trading at an undemanding 12.4 times forecast 2020 price-to-earnings ratio and a 6.2-times enterprise value to earnings before interest, taxes, depreciation and amortisation (EV/Ebitda) ratio.

UOBKH said there were several key rerating factors for TNB, including its active capital management and successful negotiations of a “gap year” for 2021.

“TNB and the Energy Commission are currently in discussions over a proposed ‘gap year’ for 2021 before commencing Regulatory Period 3 from 2022-2024.

“This will allow TNB to earn an allowable return of 7.3% for 2021, thus providing stable earnings for 2021 compared to the earlier expectation of a drop in allowable return to 7.0%, ” it said.

Meanwhile, Malakoff offers an attractive dividend yield of 7% at near current prices and UOBKH said the company was not vulnerable to Covid-19 business uncertainties.

“The company reported that power generation and waste management fell under the essential services category and had thus been operating as usual, ” UOBKH said.

“Malakoff is also protected under a long-term with an average of 20 years power purchase agreement that guarantees cashflow for its 5,822MW power plant in Peninsular Malaysia, ” it added.

Among the possible re-rating catalysts ahead include an Alam Flora tariff hike in the next three years, it said.

At the target price of RM1.05, the stock would be trading at 15 times the 2020 forecast earnings per share and six times the EV/Ebitda ratio.

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