MARC AFFIRMS TENAGA’S CORPORATE CREDIT RATING AND SUKUK RATING AT AAA AND AAAIS, RESPECTIVELY

MARC has affirmed Tenaga Nasional Berhad’s (TNB) corporate credit rating of AAA and sukuk rating of AAA_IS on its outstanding RM2.0 billion Al-Bai’ Bithaman Ajil Bonds. The ratings outlook is stable. The ratings incorporate a two-notch uplift from TNB’s standalone corporate credit rating of AA/Stable to reflect MARC’s assessment of a high likelihood of government support premised on the company’s critical role as the country’s principal energy provider. The support assessment also considers the government’s indirect majority ownership and its golden share in TNB which provides considerable leeway to influence the utility company’s business and financial profiles.

TNB’s credit strength reflects its monopolistic position in electricity transmission and distribution in Peninsular Malaysia and Sabah, its significant electricity generation capacity and strong operational track record. TNB’s generation capacity has increased to 12,904MW or 56.3% of total installed capacity in Peninsular Malaysia in 2016 following the completion and commissioning of the 250-megawatt (MW) Hulu Terengganu hydro power station, 1071MW Prai gas-fired power station, 375MW Connaught Bridge gas-fired power station and 186MW Ulu Jelai Hydro Power Station.

MARC notes that the electricity demand growth in Peninsular Malaysia which has been on a declining trend since 2012 improved to 4.0% during the financial year ended August 31, 2016 (FY2016). The growth was supported by warm weather conditions in Q3FY2016, driving TNB’s revenue and pre-tax profit to RM44.5 billion and RM8.1 billion respectively (FY2015: RM43.3 billion; RM7.1 billion). The performance has also been supported by the declining price trend of coal and liquefied natural gas (LNG) since 2012 with total fuel cost falling 7.0% y-o-y to RM15.1 billion. TNB has also benefitted from the implementation of the Imbalance Cost Pass-Through Tariff (ICPT) mechanism under which it will not be affected by any fluctuation in fuel costs, providing better earnings predictability for the group.

TNB’s cash generation ability remains fairly strong, as reflected by its net cash flow from operations (CFO) of RM13.3 billion (FY2015: RM11.4 billion). Free cash flow (FCF) improved significantly but remained negative at RM99.6 million due to high capital expenditure (capex) and large dividend payment of RM1.64 billion. TNB’s liquidity position has come under pressure from continuous investments in new generation capacity. MARC is of the view that the heavy capex requirement of RM33.3 billion in the next five years and new dividend policy are expected to exert further pressure on its liquidity cushion.

TNB’s total borrowings increased by 28.2% y-o-y to RM40.3 billion during the year, mainly from the sukuk issuance for Jimah East Power (JEP) of RM8.98 billion and the acquisition of GAMA Enerji A.S. (GAMA Enerji) for RM1.2 billion. As a result, the group’s debt-to-equity (DE) ratio weakened to 0.77 times in FY2016 from 0.66 times in the previous year. The DE could rise further in FY2017 following the issuance of US$750 million sukuk under the US$2.5 billion multi-currency sukuk issuance programme to mainly fund its overseas ventures. Although TNB’s debt-to-capital employed ratio has increased slightly from the previous year, it remained low at 0.40 times below its optimal level at 0.55 times.

MARC views TNB’s recent acquisition of 30% stake each in Turkey-based GAMA Enerji and India-based GMR Energy Limited as well as the proposed subscription of 50% stake in the UK-based Vortex Solar Investments S.A.R.L. will expand the group’s footprint globally. These acquisitions are expected to broaden TNB’s earnings base going forward. MARC notes that the group’s foreign currency-denominated borrowings, which have declined by 4.5% in FY2016, comprise only 17.4% of its total borrowings. Of this, yen comprised 8.7%, US dollar 8.5% and others 0.2%. TNB hedges its foreign currency risk by requiring a minimum of 50.0% of the group’s known foreign currency exposure to be hedged for up to 12 months’ via forward exchange and currency options contracts.

The stable outlook reflects MARC’s expectations that the government support assumption will be sustained in the next 12 to 18 months in view of TNB’s strategic importance to the nation’s energy security. Any weakening in TNB’s debt protection measures and/or liquidity buffer would exert pressure on its standalone rating.

Contacts: Chermayne Eng, +603-2082 2267/ chermayne@marc.com.my; David Lee, +603-2082 2255/ david@marc.com.my.

April 14, 2017