Fundamental Analysis of TENAGA NASIONAL BHD by L. C. Chong https://lcchong.wordpress.com/ https://www.facebook.com/groups/285121298359919/

1. TENAGA
FUNDAMENTAL ANALYSIS
Financial Year 2015 (31 Aug 2015)
L. C. Chong
23 November 2015

2. DISCLAIMER
I am NOT an investment advisor nor a financial advisor, and no information provided
here is to be interpreted as a suggestion to buy or sell securities.
Stock analysis in this presentation may not neutral because I have incorporated my
risk appetite and principles in the analysis.
All figures in MYR and in '000s, except per share data
2

3. DECLARATION OF INTEREST
• At the time of writing, I owned shares of TENAGA.

4. KEEP IN TOUCH
http://lcchong.wordpress.com
https://goo.gl/jjkq4P

5. SCOPE
• Figures and ratios are based on the figures reported in Annual Report or the latest
Q4 Quarterly Report (QR)
• Unless there is a need, this analysis will not include financial figures reported in Q1,
Q2 and Q3
• I will provide QR result highlights in my blog
• Valuation is not covered in this analysis
• I will provide valuation in my blog.

6. CHANGES
• 29 Oct 2015 – First write up of TENAGA in PowerPoint format
• 22 Nov 2015 – Applied new template and updated figures based on the AR 2015

7. BUSINESS PROFILE
• Primarily involved in the business of the generation, transmission, distribution and
sales of electricity
• The largest electricity utility in Malaysia and one of the largest in the region
• Serves an estimated 8.6 million customers in Peninsular Malaysia, Sabah and Labuan
Source: The Edge Markets 1 Aug 2015

8. BUSINESS PROFILE (CONT.)
Generation
• 6 thermal power stations and 3 major hydroelectric power generating schemes in addition
to supporting the operations and maintenance of 3 Independent Power Producers
Transmission
• Connects power generated byTNB and IPPs throughout Peninsular Malaysia with
Distribution’s network as well as directly to large industrial customers via the NationalGrid
Distribution
• Supplies the electricity to the end users

9. OWNERSHIP SUMMARY
INSTITUTIONS
49%
SOVEREIGN WEALTH FUNDS
(>5% STAKE)
30%
PUBLIC AND OTHER
19%
STATE OWNED SHARES
2%
CORPORATIONS (PRIVATE)
0%
INDIVIDUALS/INSIDERS
0.00%
Position Date: 22 Nov 2015

10. TOP 5 SHAREHOLDERS
KHAZANAH NASIONAL
BERHAD
47%
EMPLOYEES PROVIDENT
FUND OF MALAYSIA
27%
PERMODALAN NASIONAL
BERHAD
20%
JPMORGAN CHASE & CO,
PRIVATE BANKING AND
INVESTMENT BANKING
INVESTMENTS
3%
KUMPULAN WANG
PERSARAAN
3%
Position Date: 22 Nov 2015

11. ECONOMIC MOATS
• Cost Advantage
• They have strong support from government in pricing.
• Switching Costs
• Like it or not, we can't live without TENAGA….
• Network Effect
• The more people consume electricity, the more money they make. So simple!
• Intangible Assets
• GLC status - Government won't setup a new company to compete with TENAGA.
• Efficient Scale
• TENAGA is the sole electricity generator in Malaysia.
• Have characteristics of rational oligopolies

12. ECONOMIC MOATS (CONT.)
4.9%
6.7%
4.6% 4.4%
5.0%
1.8%
5.3%
5.9%
6.4% 6.4%
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
0.0%
2.0%
4.0%
6.0%
8.0%
2006-08-31 2007-08-31 2008-08-31 2009-08-31 2010-08-31 2011-08-31 2012-08-31 2013-08-31 2014-08-31 2015-08-31
ROIC
NOPAT ROIC
NOPAT is a bit volatile, but increasing in long term

13. ECONOMIC MOATS (CONT.)
54,751,250 55,692,200 57,325,550 58,903,300 59,937,900 61,939,900
66,515,500
73,699,750
82,111,500
89,864,450
0
20,000,000
40,000,000
60,000,000
80,000,000
100,000,000
2006-08-31 2007-08-31 2008-08-31 2009-08-31 2010-08-31 2011-08-31 2012-08-31 2013-08-31 2014-08-31 2015-08-31
Avg. Invested Capital
Invested capital increased every year

14. ECONOMIC MOATS (CONT.)
• Under normal circumstances, ROIC of TENAGA ranged between 5% and 6.7%
• Is this range of ROIC normal in the utilities industry?

15. ECONOMIC MOATS (CONT.)
Company 1-Yr ROIC 5-Yr ROIC
Edison International 9.11% 6.30%
Public Service Enterprise Group 6.23% 8.69%
Southern Co. 6.07% 5.83%
Williams Companies 5.53% 3.18%
Consolidated Edison 4.76% 4.97%
NextEra Energy 4.05% 5.56%
American Electric Power 4.01% 5.15%
NiSource Inc. 3.88% 2.92%
Duke Energy 3.46% 3.17%
PG & E Corp. 3.40% 5.10%
Centerpoint Energy 3.37% 4.60%
Exelon Corp. 2.45% 9.48%
FirstEnergy Corp. 2.27% 4.16%
Dominion Resources 1.12% 5.82%
AES Corp. -4.19% 1.62%
Source: Seeking Alpha 16 May 2013

16. ECONOMIC MOATS (CONT.)
• As of May 2013, average of ROIC of major utilities companies in US was 5.1%±2%
• So, I can conclude that ROIC of TENAGA was above average.

17. ECONOMIC MOATS (CONT.)
• Exception: In FY11, ROIC was 1.8% which is the lowest in history. Reasons:
• Operating expenses increased by 19.1% from RM26,519.7m (FY10) to RM30,956.4m
(FY11)
• Average coal price for the year increased from USD88.2/mt to USD106.9/mt
• Additional imports of coal, oil and distillate (5 times higher per kW) due to gas shortfall
• Incurred higher Independent Power Producers (IPP) purchases amounted to RM14,213.0,
an increase of 13.4% from RM12,528.0.

18. ECONOMIC MOATS (CONT.)
8.9%
11.4%
5.8%
6.6%
8.1%
1.7%
4.2%
3.5%
2.3% 2.3%
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
2006-08-31 2007-08-31 2008-08-31 2009-08-31 2010-08-31 2011-08-31 2012-08-31 2013-08-31 2014-08-31 2015-08-31
CROIC
Free Cash Flow to Firm CROIC

19. ECONOMIC MOATS (CONT.)
3,878,950
4,488,200 4,805,950
4,360,650
3,925,500
4,689,750
6,326,150
7,781,400
9,222,600
10,051,850
0
2,000,000
4,000,000
6,000,000
8,000,000
10,000,000
12,000,000
2006-08-31 2007-08-31 2008-08-31 2009-08-31 2010-08-31 2011-08-31 2012-08-31 2013-08-31 2014-08-31 2015-08-31
Avg. Capex

20. ECONOMIC MOATS (CONT.)
• CROIC declined almost every year, and it was only 2.3% in FY15
• The main reason is high capex reduced TENAGA’s free cash flow, while invested
capital increased every year
• This is probably the reason why TENAGA unlikely to increase dividend payout.

21. SCALE
0
10,000,000
20,000,000
30,000,000
40,000,000
50,000,000
2006-08-31 2007-08-31 2008-08-31 2009-08-31 2010-08-31 2011-08-31 2012-08-31 2013-08-31 2014-08-31 2015-08-31
Revenue
Revenue scale of TENAGA has been increasing every year. The
increased scale provides flexibility for a company to mitigate the
risks associated with liberalized power markets, including
competition in generation and supply and the management of
commodity price volatility
7.8% CAGR

22. PROFITABILITY
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
0
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
7,000,000
2009-08-31 2010-08-31 2011-08-31 2012-08-31 2013-08-31 2014-08-31 2015-08-31
Core net profit Net Profit Margin %

23. PROFITABILITY (CONT.)
• FY19
• FX translation loss: -RM1,239m (FY08: RM34m)
• Higher average coal price of USD90.2/mt during the year, exceeding the USD85/mt
recoverable under the tariff adjustment effected in March 2009
• FY11
• Operating expenses increased by 19.1% from RM26,519.7m (FY10) to RM30,956.4m
(FY11)
• Average coal price for the year increased from USD88.2/mt to USD106.9/mt
• Additional imports of coal, oil and distillate (5 times higher per kW) due to gas shortfall
• Incurred higher Independent Power Producers (IPP) purchases amounted to RM14,213.0,
an increase of 13.4% from RM12,528.0

24. PROFITABILITY (CONT.)
19.8%
21.1%
13.9%
19.4%
23.0% 22.1%
25.2%
0
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
35,000,000
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
2009-08-31 2010-08-31 2011-08-31 2012-08-31 2013-08-31 2014-08-31 2015-08-31
Profit Margin
Cost of Raw Material Gross Margin %

25. PROFITABILITY (CONT.)
• Cost of raw material has been increasing over the years
• Higher generation costs from the burning of the more expensive imported LNG
• Coal plant outages and low hydro availability due to the dry season necessitated the
utility company to fully utilise the gas plants which resulted in increased usage of the
more expensive liquefied natural gas and at times, even oil and distillates
• Revise of tariff regime becomes an important driver of Tenaga’s earnings
• Except FY11, TENAGA maintained gross profit above 19%
• In FY15, TENAGA achieved 25% profit margin due to lower coal prices.

26. LEVERAGE & COVERAGE
5.90 x
11.64 x
10.54 x
11.53 x
12.79 x
0.00 x
2.00 x
4.00 x
6.00 x
8.00 x
10.00 x
12.00 x
14.00 x
2011-08-31 2012-08-31 2013-08-31 2014-08-31 2015-08-31
(FFO+Int. Exp.)/ Int. Exp.

27. LEVERAGE & COVERAGE (CONT.)
29.7%
44.1%
36.2%
34.0%
41.5%
25.6%
43.0%
31.3%
29.6%
36.3%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
2011-08-31 2012-08-31 2013-08-31 2014-08-31 2015-08-31
FFO To Debt
FFO to Debt (FFO – Dividends) / Debt

28. LEVERAGE & COVERAGE (CONT.)
34.9%
34.4%
39.1% 39.1%
36.5%
32.0%
33.0%
34.0%
35.0%
36.0%
37.0%
38.0%
39.0%
40.0%
2011-08-31 2012-08-31 2013-08-31 2014-08-31 2015-08-31
Debt / Book Capitalization

29. LEVERAGE & COVERAGE (CONT.)
• As of FY15, TENAGA’s leverage and coverage are as below:
• (FFO+Int. Exp.)/ Int. Exp. – 12.79x (Aaa)
• FFO to Debt – 41.5% (Aaa)
• (FFO – Dividends) / Debt – 36.3% (Aaa)
• Debt / Book Capitalization – 36.5% (A)

30. DEBT EXPOSURE AND FOREX
JPY
15%
USD
7%
Others
0.07%
RM
78%
31-Aug-15
JPY
13%
USD
10%
Others
0.19%
RM
77%
31-Aug-14
On debt exposure, total debt decreased slightly to RM24.7b (FY15) from RM25.5b (FY14). On the other hand, the
debt exposure to USD denominated borrowings was decreased to 7% (FY15) from 10% (FY14).

31. ANNUAL SYSTEM LOSS
Source: Maybank IB Research 30 Oct 2015
System loss = the difference between electricity sales and
generation)

32. GROWTH DRIVERS
• Manjung 4 will be the first in Malaysia to utilise an ultra-supercritical boiler which
would enable 40% efficiency energy efficiency compared to the existing three
subcritical units at Manjung
• Gas shortages to the power sector are in its final days with the Melaka regasification
terminal set to commence soon and Tenaga will no longer be burdened by the
excessive use of alternative fuel
• 23 Sep 2014 - Consortium of TENAGA and Powertek Berhad (PB) had signed a
Memorandum of Understanding (MoU) with Bangladesh Power Development Board
(BPDB) to implement RM6b power plant project in Maheshkhali, Cox’s Bazar,
Bangladesh.

33. GROWTH DRIVERS (CONT.)
Source: Hong Leong Investment Bank 30 Oct 2015

34. GROWTH DRIVERS (CONT.)
• 5 Mar 2015 – TENAGA's 1,071 megawatt (MW) combined cycle power plant in
Seberang Perai, Pulau Pinang, is on track for commercial operation on Jan 1, 2016
• The RM2.5 billion project, utilising the world's largest and most efficient gas turbine
(Siemens HClass), is currently 94% complete
• 24 Sep 2014 – TNB and 1MDB in RM6bil power deal in Bangladesh
• 17 Oct 2014 - Renewable energy generation requires TNB to enhance our
distribution system from only supplying power to the consumers to a more
sophisticated network. In other words, with the implementation of the Feed-in-Tariff
(FiT), TNB system is continuously being upgraded.

35. GROWTH DRIVERS (CONT.)
• 15 Sep 2014 – From June 1 to Aug 26 (last available data point), the average
availability of Tanjung Bin was 95%, Jimah 95% and Janamanjung 93%, all healthily
above the 85% threshold expected of coal plants
• The higher coal plant availability means the proportion of coal-fired generation would
have trended up significantly
• In terms of sensitivity, every one percentage point increase in the percentage of coal
generation (with coal at US$85 [RM272] per tonne) raises FY15 net profit by 4.5%
• TNB’s usage of costlier LNG-sourced gas is coming down
• TNB is benefiting more from falling coal prices.

36. GROWTH DRIVERS (CONT.)
Source: AmResearch 30 Oct 2015
TNB basking in higher coal usage

37. PROFITABILITY (CONT.)
Source: https://goo.gl/TcZQcP
Source: http://goo.gl/IOQIr5
Source: http://goo.gl/UGFPJH

38. GROWTH DRIVERS (CONT.)
Source: AmResearch 30 Oct 2015

39. GROWTH DRIVERS (CONT.)
Source: Hong Leong Investment Bank 30 Oct 2015
Power demand still
strong

40. GROWTH DRIVERS (CONT.)
Source: Hong Leong Investment Bank 30 Oct 2015

41. GROWTH DRIVERS (CONT.)
Source: AmResearch 30 Oct 2015
In line with increased
power demand,
TENAGA increased
capex in generation
capacity.
Segmental Breakdown of TENAGA’s CAPEX

42. ISSUES/RISKS/CHALLENGES
• A/R increases much faster than booking sales. They should be more diligent to
collect outstanding bills.
• Very sensitive to currency appreciation/depreciation - the weakening of the Ringgit
against the US Dollar can cause loss in foreign currency translation.
• Tenaga still burdened by the excessive use of alternative fuel.
• Disruption in gas supply.
• Government possibly delay tariff revision in the future.
• Indonesia implements tax on coal export.
• Utilization of coal-fired power plants have reach limit.

43. ISSUES/RISKS/CHALLENGES (CONT.)
• 17 Jul 2014 – FCPT implementation in 2014 – Delayed, but not derailed
• 17 Jul 2014 – Higher generation costs from the burning of the more expensive
imported LNG
• 1 Aug 2015 – TENAGA to acquire the remainder of 1MDB’s power assets
• These assets, five local and eight foreign power plants with a net generating capacity of
5,600MW spanning five countries, are housed under 1MDB’s power arm, Edra Energy
Global Bhd.

44. ISSUES/RISKS/CHALLENGES (CONT.)
Source: Maybank IB Research 30 Oct 2015
Usage of
imported LNG
still high.

45. POOR STEWARDSHIP
• Complacency due to monopoly and protected by government
• “Tidak apa” attitude
• Most of the workers and management teams are the same people prior to their
privatisation
• Their work ethic has remained the same despite the transformation to a private entity.

46. SHAREHOLDER RETURN
Time Frame Date Bought at Original
Value
Dividend
Received
Unrealized
Gain/Loss
Current
Return
CAGR %
3-Y 29 Oct
2012
6.96 6,960 790 5,700 13,450 24.6%
5-Y 29 Oct
2010
7.04 7,040 1,307.38 8,785 17,132.38 19.5%
10-Y 28 Oct
2005
6.464 6,464 2,911.72 13,317.25 22,692.97 13.4%
Assumptions:
1. Commission paid is ignored in this simulation
2. The current price is 12.62 (as of the time of writing)
3. Unit purchased is 1,000.

47. GOING FORWARD
• 30 Oct 2015 – FY15 electricity generation was likely lower than budgeted given the
weaker-than-projected demand (+2.2% YoY) and the record low system loss. This
led to better-than-expected generation mix (coal was up, to 45.6% from 39.8% in
FY14), hence the earnings beat. If system loss continues to remain below trend, TNB
would be able to deliver earnings growth in FY16
• 30 Oct 2015 – While TNB’s existing operating prospects remain sound, concerns
remain over its possible acquisition of Edra Global’s assets.

48. GOING FORWARD (CONT.)
• Positive on TNB’s earnings outlook given the easing trend in fuel costs due to the
decline in coal and gas prices
• The implementation of FCPT mechanism remains as TNB’s secular catalyst in order
to justify an even higher future valuation as it will definitely provide a greater clarity
and stability to TNB’s long term earnings
• I will continue to hold TENAGA, and may accumulate TENAGA in the future.