Tenaga’s transmission and distribution business is likely to remain under TNB as this is a natural monopoly, analysts say, as well as to avoid duplication of expensive infrastructure. — Reuters photo
KUCHING: Tenaga Nasional Bhd’s (TNB) latest announcement of an internal reorganisation may lead to separate listings of respective units, analysts project in a corporate update on the group.
In a filing on Bursa Malaysia on Monday, TNB revealed that the proposed internal reorganisation will involve the transfer by TNB of the assets, liabilities and business undertakings – including shares held in certain of its subsidiaries – of the following business divisions to two new wholly-owned subsidiaries of TNB to be incorporated.
These included the transfer of the domestic power generation business of TNB to a new wholly-owned subsidiary of TNB to be incorporated (GenCo) and transfer of the electricity retail business of TNB to a new wholly-owned subsidiary of TNB to be incorporated (RetailCo).
After the completion of the proposed internal reorganisation, TNB’s principal activities will be the operation of the high voltage national grid and the distribution of electricity to customers (Transmission and Distribution Business or T&D), the international power generation business including thermal power generation, conventional and renewable energy generation business, the provision of corporate and-or shared service functions to GenCo and RetailCo and other companies within the TNB Group.
“We would not rule out the possibility of separate listings of the respective units as each of three units essentially carries distinctly different risk profiles, allowing for better valuation discovery,” the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) said.
“The legacy regulated business such as T&D entails very low risk (almost bond-like), steady earnings and returns, while Genco and Retailco are higher risk units which can carry higher returns.
“For example, Genco internal rate of return (IRR) is estimated to be in the high single-digits while Retailco, even in its regulated form allows for volume upside as it operates on a price-cap basis.”
Based on RP2 projections, MIDF Research estimated the legacy T&D business to generate average annual net earnings of approximately RM3.8 billion and retail at RM21 million.
“The non-regulated units; Genco and operations and maintenance (O&M) operations are estimated to generate circa RM1.7 billion-RM2.2 billion annual profits, making up 30 per cent-38 per cent of TNB’s annual earnings.”
On T&D, the research arm opined that it is likely to remain under TNB as this is a natural monopoly (even in advanced, liberalised electricity market as Singapore) and to avoid duplication of expensive infrastructure.
“The T&D business in the foreseeable future is expected to remain the key driver of TNB’s earnings (accounting for 60 per cent to 70 per cent of group earnings).”
Should a liberalisation of the retail market and transition to a merchant market take place, the research arm foresees a Third Party Access (TPA)-like model taking place akin to the gas sector, for TNB’s T&D.
“As it is, tariffs are already unbundled; transmission accounts for 10 per cent of the current regulated tariff of 4.03sen per kilowatt per hour (kwh) while distribution accounts for 18 per cent (7.15sen per kwh).”
As for the Single Buyer (SB) carve out, while the separation of the SB function of TNB had been mentioned in the past, MIDF Research saw that there has been no update so far.
“The separation of the SB role could catalyse a valuation re-rating for TNB since the SB essentially carries the majority of the fuel risk in the current structure.”
In addressing the retail competition landscape, MIDF Research highlighted that if cost of sourcing electricity for new retailers is similar, TNB will be a tough competitor given the group’s current dominance in the retail segment and a strong balance sheet backing.
The research arm also highlighted that if new retailers are willing to undercut TNB, this potentially means lower returns than the current 7.3 per cent the group is getting under the regulated framework.
“On the flip side, if more value added is offered as part of the new competitive landscape and liberalised market, this could actually mean increased returns for both TNB and the new retail players.”