The Three Numbers That Electrify Tenaga Nasional Berhad

We all need electricity. But someone has to produce it, transmit it and distribute it to where it is needed.

In Malaysia, that is the job of utility company, Tenaga Nasional Berhad (KLCI: TENAGA) (5346.KL), which operates thermal stations, hydroelectric power plants, as well as managing the National Grid.

It is the largest electric utility in Malaysia and the largest power company in Southeast Asia, with over 8 million customers. It is also quite good at generating a decent Return on Equity for shareholders.

Its RoE of 13.3% compares favourably with its Singapore and Australian peers, Sembcorp Industries (SGX: U96) and AusNet (SGX: AZI), which only managed a RoE of 6% and 1% respectively last year.

Tenaga’s impressive Return on Equity can be traced to its impressive Net Income Margin of 14.1%, which would even make Spanish utility titan Iberdrola drool with envy. Iberdrola’s Net Income margin is about half that of Tenaga’s at 7%. It means that Tenaga makes MYR14.10 of bottom-line profit on every MYR100 of sales.

Tenaga Nasional’s Asset Turnover is not particular outstanding, though. At 0.38, it suggests that the utility company generates MYR38 of sales on every MYR100 of assets. In terms of efficiency, it lags that of Sembcorp Industries, which generates S$0.51 of sales on every S$1 of asset employed.

The company does make use of leverage. But it is not unusual for utility companies to make use of leverage. In 2015, it had Total Liabilities of MYR69 billion and Total Assets of MYR117 billion. That equates to a Leverage Ratio of 2.5. The median Leverage Ratio for the Malaysia market is around 0.2.

By dismantling the Return on Equity for Tenaga Nasional Berhad, it is easy to see why the company is electrifying. Its Return on Equity of 13.3 is the product of an outstanding Net Income Margin of 14.1%; a modestly efficient Asset Turnover of 0.38 and a hefty Leverage Ratio of 2.5.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.