Tenaga Nasional Bhd (Nov 10, RM 5.79)
Maintain neutral with unchanged target price of RM6.70: With reference to Tenaga Nasional Bhd’s US dollar-based bond exposure (totalling RM2.9 billion and accounting for 15% of TNB’s total borrowing profile), Standard & Poor’s (S&P) Ratings Services has revised down its outlook on TNB from stable to negative. This is premised on weakened profitability and higher operating cost.
S&P affirmed its BBB+ long-term corporate credit rating and the axA+/ axA-1 Asean regional scale rating on TNB. It also affirmed the BBB+ issue rating on its senior unsecured notes.
Similar to Moody’s rating outlook published yesterday, S&P is of the view that the government would provide timely and sufficient extraordinary support to TNB in the event of financial distress. S&P could revise TNB’s outlook to stable if the government provides some fuel price relief that would enable TNB to recover losses from fuel shortages.
Otherwise, S&P will likely downgrade TNB’s US dollar bond ratings. This may cause the yields to rise, thereby pushing up future borrowing costs for TNB’s international bonds in the future.
Having said that, we do not expect a downgrade by international rating houses (S&P, Moody’s) to materially impact TNB’s borrowing cost because TNB is unlikely to raise future capex funding via US dollar debt given that its revenue cash flow is ringgit-based.
It has been actively retiring its US dollar debts in the past year in view of the depreciation of the greenback against the ringgit. The next rating reviews, which are more crucial, are expected at the end of this year or in January 2012 by Malaysian Rating Corp Bhd (MARC) and RAM Rating Services Bhd.
Any negative outlook from MARC and RAM would have an impact on TNB’s ringgit-based bond borrowing cost. We do not expect significant deviation in MARC and RAM’s rating on TNB as any downgrade would have wider repercussions on the broader Malaysian bond market — especially the bond ratings on independent power producers — and this may impede the country’s ability to plan its future power plant capacity efficiently (as a downgrade in TNB’s rating will likely result in higher borrowing cost for all future power plant projects).
At this juncture, we see little risk from S&P’s negative outlook. Maintain “neutral” with an unchanged RM6.70 per share price target, a 10% discount to our discounted cash flow of RM7.44 per share (8% discount rate; 3% terminal growth rate). — Affin Investment Bank, Nov 10
This article appeared in The Edge Financial Daily, November 11, 2011.
Maintain neutral with unchanged target price of RM6.70: With reference to Tenaga Nasional Bhd’s US dollar-based bond exposure (totalling RM2.9 billion and accounting for 15% of TNB’s total borrowing profile), Standard & Poor’s (S&P) Ratings Services has revised down its outlook on TNB from stable to negative. This is premised on weakened profitability and higher operating cost.
S&P affirmed its BBB+ long-term corporate credit rating and the axA+/ axA-1 Asean regional scale rating on TNB. It also affirmed the BBB+ issue rating on its senior unsecured notes.
Similar to Moody’s rating outlook published yesterday, S&P is of the view that the government would provide timely and sufficient extraordinary support to TNB in the event of financial distress. S&P could revise TNB’s outlook to stable if the government provides some fuel price relief that would enable TNB to recover losses from fuel shortages.
Otherwise, S&P will likely downgrade TNB’s US dollar bond ratings. This may cause the yields to rise, thereby pushing up future borrowing costs for TNB’s international bonds in the future.
Having said that, we do not expect a downgrade by international rating houses (S&P, Moody’s) to materially impact TNB’s borrowing cost because TNB is unlikely to raise future capex funding via US dollar debt given that its revenue cash flow is ringgit-based.
It has been actively retiring its US dollar debts in the past year in view of the depreciation of the greenback against the ringgit. The next rating reviews, which are more crucial, are expected at the end of this year or in January 2012 by Malaysian Rating Corp Bhd (MARC) and RAM Rating Services Bhd.
Any negative outlook from MARC and RAM would have an impact on TNB’s ringgit-based bond borrowing cost. We do not expect significant deviation in MARC and RAM’s rating on TNB as any downgrade would have wider repercussions on the broader Malaysian bond market — especially the bond ratings on independent power producers — and this may impede the country’s ability to plan its future power plant capacity efficiently (as a downgrade in TNB’s rating will likely result in higher borrowing cost for all future power plant projects).
At this juncture, we see little risk from S&P’s negative outlook. Maintain “neutral” with an unchanged RM6.70 per share price target, a 10% discount to our discounted cash flow of RM7.44 per share (8% discount rate; 3% terminal growth rate). — Affin Investment Bank, Nov 10
This article appeared in The Edge Financial Daily, November 11, 2011.
