[RAM] RAM Ratings reaffirms TNB's AAA/Stable/P1 ratings

The ratings are premised on the Group's strategic position as Malaysia's national electricity company as well as its resilient operating and financial performance. Based on RAM's rating methodology for government-linked entities, TNB is highly likely to receive extraordinary government support in the event of financial distress. This is underscored by the Group's critical role in the Malaysian power sector and its very strong relationship with the Government of Malaysia. 

Besides its near-monopoly over the transmission and distribution of electricity across Peninsular Malaysia and Sabah, TNB also controlled 57.9% of the peninsula's generating capacity of 25,212 MW as at end-December 2020. The Group also serves a crucial function as the sole off-taker of generating capacity and electrical energy produced by independent power producers in Peninsular Malaysia (via Single Buyer – a ring-fenced entity owned by TNB). 

We have a favourable view of the incentive-based regulation (IBR) framework as it provides TNB with stable returns in each regulatory period (RP), in addition to an established imbalance cost-pass-through mechanism. Any movement in fuel and other generating cost will be adjusted to its tariffs bi-annually. The Group's ability to extend RP2 (2018–2020) under the same tariffs by another year, i.e. to 2021 (known as the RP2 Extension), supports the stability of its near-term earnings.

Despite softer electricity demand amid the pandemic, TNB's operating profit before depreciation, interest and tax stayed relatively stable at RM17.0 bil in FY Dec 2020 (-3.6% y-o-y, against a 13.7% revenue drop to RM44.0 bil), thanks to the IBR framework. That said, net profit still contracted 18.6% to RM3.6 bil. This was due to heftier depreciation, a bigger allowance for doubtful debts, the negative impact of MFRS 16 and poorer finance income, albeit cushioned by higher tax credit from the special reinvestment allowance. 

Meanwhile, TNB continues to reassess its overseas businesses. Debt restructuring and asset monetisation exercises are underway for its distressed assets – GAMA Enerji AS in Turkey, GMR Energy Ltd in India and TNB Liberty Power Ltd in Pakistan. By contrast, it raised its stakes in its performing assets – Tenaga Wind Ventures UK Ltd (+20%) and Vortex Solar Investments Sarl (+5%) – emerging as the sole and major shareholder of the respective companies. All in all, the Group's overseas segment's revenue contribution stayed minimal at 1.1% (average of past three years). 

In line with the global trend of environmental sustainability, TNB is expanding aggressively in the renewable energy (RE) arena to meet its group-wide target of 8,300 MW of RE capacity mix by 2025 (end-December 2020: 3,398 MW). This will be achieved primarily through acquisitions of operational wind and solar assets in the UK, Europe and Southeast Asia, as well as participation in local and international greenfield projects. Notably, the Group has been shortlisted for a 50 MW solar photovoltaic project under Large-Scale Solar Mentari.

As at end-FY Dec 2020, TNB's total adjusted debt (including provisions for GAMA Enerji and GMR Energy) had risen to RM78.9 bil, from RM77.7 bil a year earlier, following a RM3 bil sukuk drawdown. After factoring in another generous dividend payout of RM4.6 bil for FY Dec 2020 and the Group's investment plans, our stressed cashflow analysis assumes another RM3 bil of borrowings and higher operating expenses this year. Although this will weaken TNB's funds from operations debt coverage and gearing ratios to a respective 0.20 and 1.44 times, they remain supportive of its ratings. Overall, the Group still has room for additional borrowings if required. 

 

Analytical contact
Chu Jia Ying
(603) 3385 2519
jiaying@ram.com.my

Media contact
Padthma Subbiah
(603) 3385 2577
padthma@ram.com.my