# Measuring the Profitability of TNB

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# Literature Review Measuring the Profitability of TNB

Tenaga Nasional Berhad (TNB) is the largest company that produces electricity utility in Malaysia. After privatization on 1990 through a corporatization and privatization exercise by the Malaysia Government of the National Electricity Board (NEB), TNB had a monopoly for the generation, transmission and distribution of electricity in Malaysia. However, TNB lost its monopoly in the generation of electricity in the wake of 1992 nationwide blackout. As a result, TNB needs to end it’s monopoly in generation by encourage private sector participation. There were five companies, that have formed an association called as Penjanabebas which are Powertek, Port Dickson Power, Genting Sanyen Power, YTL Power Generation and Segari Energy Ventures This companies have licenses to generate power but not to distribute the electricity supply. Though, TNB still maintains its monopoly in the transmission and distribution of electricity.

The electricity market consists of the sale of electricity to industrial, commercial, household, transportation, and other end-users, including agricultural (Datamonitor, 2010). Most utility companies did not have to deal with demanding consumers, since they were operating in a monopolistic environment. If the consumer demanded something that the utility provider did not really want to give, so, it was the consumer’s tough luck from Hayes T. M. and Helms M. M., (1999). Monopoly is a circumstance in which one company supplies the entire market from Blythe (2006).

Economic and financial performance is defined by Bistriceanu G. O. (2001) as ‘a higher quality level of the economic and financial activity of private businesses that can be assessed with the help of several indicators, such as: turnover, return on equity, work productivity, capital yield, gross and net profits, annual fixed capital renewal rate, the efficiency of using fixed means etc.’ Furthermore, profit margin, return on assets, return on equity, return on sales are common measures of financial profitability by Robinson (1982), Schendel (1983), (Dodgson and Rothwell, 1995), (Hitt, 2001) and Harris and Ogbonna (2001). However, Abu Kassim (1989) found that Malaysian manufacturing firm preferred financial measures such as sales, sales growth, net profit and gross profit.

Background of the Company

Before privatization of TNB, Central Electricity Board (CEB) was established on 1 September 1949. CEB was responsible to generate and distribute electricity supply. After implement several efforts to develop electricity, CEB was renamed as National Electricity Board (NEB) or Lembaga Lektrik Negara (LLN) on 22 June 1965. Between 1964 and 1982, NEB had combined the generation, transmission and distribution with the take over several facilities that were owned by private company and local government such as Huttenbachs in 1990 and Jabatan Bekalan Lektrik Majlis Perbandaran Pulau Pinang in 1964.

In accordance with government privatization policy, Tenaga Nasional Berhad was registered on 1 September 1990. All properties right and responsibility of NEB were transferred to TNB. Through the license that has been issued by Ketua Pengarah Bekalan Elektrik to TNB, the company had started the operation. 2 years later, TNB had created a history when had been listed in Bursa Saham Kuala Lumpur (BSKL) now known as Kuala Lumpur Stock Exchange (KLSE) on 28 May 1992. TNB was one of the largest market capitalizations on the KLSE, stands out as one of the most successful privatization efforts by the Malaysian Government.

The TNB’s activities are; first, generating the electricity from the raw materials such as coals, fuel, gas, hydro, solar and other sources. The latest is fiber optic. Next, it will be transmitted through main entrance substation or pencawang masuk utama (PMU), main division substation or pencawang pembahagian utama (PPU), suis stesyen utama (SSU) and electrical substation or pencawang elektrik (PE). Lastly, it will be distributed to domestic and non – domestic consumers. The consumers need to pay the bills through cash, cheque, credit card, debit card and electronic fund transfer (EFT).

Currently the TNB Group has a complete power supply system, including the National Grid. For the convenience of customer, well manned Customer Services Centre, Call Management Centre and administrative offices throughout the Peninsular Malaysia and Sabah have providing the supporting services.

Through TNB’s subsidiaries, it also involved in the manufacturing of transformer, high voltage switchgears and cables, the provider of professional consultancy services, architectural, civil and electrical engineering works and services, repair and maintenance services and fuel undertakes research and development, property development and project management services.

Problem Statement

This research study is to measure the profitability of TNB. This study seeks then to determine which factor give the highest affect to the profitability most? This study also to identify what are the impacts of return on asset, return on equity and net profit margin on the profitability of TNB?

Objective of the study

To determine the factor that give highest effect to the independent variables.

To identify the relationship between independent variables and dependent variable.

Research Question

Which factor give the highest effect to the dependent variables most?

What are the relationships between independent variables and dependent variable?

Limitation of the Study

Monopoly

As TNB is a monopoly company, so the company cannot be compared to other competitive company in Malaysia.

Choice of variables

It is difficult to measure accurately the relationship of TNB’s profitability between return on asset, return on equity and net profit margin. These are not the only factors that contribute to the profitability of TNB. The researcher cannot deny that there may be some other variables that might effect the profit movement.

Time frame

The data gathered in this research are only for 12 years from 1999 to 2010. So the results cannot be measured accurately and does not show the profitability from the year TNB has started operating.

Limited Knowledge and Skill

As student, the extent of knowledge and skill regarding the research paper is limited. Therefore, many difficulties or problems arise in the process of completing this research.

Scope of the Study

The selected company is Tenaga Nasional Berhad (TNB) and the scope is focusing in Malaysia. The study only focuses on the performance of the company by evaluating the profit trend of TNB. This company was chosen to determine the relationship of the selected variable with the profit of TNB for the past 12 years from the year 1999 to 2010. The factors that were defined as independent variables are return on asset (ROA), return on equity (ROE) and net profit margin (NPM). The dependent variable is the profitability.

Significance of the Study

According to Albu C., Albu N. (2004) the diversity of definitions of performance proves that it is used differently by the users of financial information, depending on their interests. Thus, managers are focused on the global performance of their company, the present and potential future investors understand performance as the profitability of their investments, employees are interested in company stability and profitability, creditors are interested in its creditworthiness, while clients are focused on company stability. Performance and value are the ideal pair for an efficient and modern management of companies and partnerships. ‘To measure performance means to appreciate value and to know value means to ‘translate’ performance. Following are the significance of the study for TNB.

TNB

This study is useful for TNB because they can identify which variable might give more profit to the company. So, they can concern more on that variable.

As a guideline to the management of TNB to maintain the organization’s performance from year to year.

It helps to increase the efficiency of management of TNB.

Government

The government can understand the TNB profits behavior. So, the government can control the price setting to ensure the price is fair and avoid price discrimination.

Researcher

To help the researcher to determine whether there is a positive or negative relationship between return on asset, return on equity and net profit margin on profitability.

Help the researcher to understand more about the performance of profitability in TNB.

This study might be a useful guidance or reference for the future researchers to make further research and analysis.

Investor/public

Through this study, the investors can think wisely whether they should invest in TNB or not.

Provides information to the public on the performance of profitability of TNB for each year.

Policy of the economy

Provide information about the main contributor to the economy of Malaysia.

As a guideline of the Malaysian economy to maintain the key contribution for the economy growth.

Theoretical Framework

IV DV

Chart `1: Theoretical Framework

Hypothesis

Hypothesis 1

H0 : There is no relationship between profitability and return on asset

H1 : There is positive relationship between profitability and return on asset

Hypothesis 2

H0 : There is no relationship between profitability and return on equity

H1 : There is positive relationship between profitability and return on equity

Hypothesis 3

H0 : There is no relationship between profitability and net profit margin

H1 : There is positive relationship between profitability and net profit margin

Definition of Terms

Profitability

The amount of revenue gained from a company’s business activity after accounting for all the expenses, depreciation, interest and taxes to reach earning after taxes.

Return on Asset

It is the profitability indicator. It indicates total net profit divided by total asset. ROA gives an idea on how efficient the company’s management is when using the assets to generate profits. The result is shown in percentage.

Return on Equity

It is the profitability indicator. It indicates total net profit divided by total equity. ROE reveals how much profit a company generates with the money shareholders have invested. The result is shown in percentage.

Net Profit Margin

It is the profitability indicator. It indicates total net profit divided by total sales. A higher profit margin indicates a more profitable company that has better control over its costs. The result is shown in percentage.

Summary

This paper is focus on the profitability performance of Tenaga Nasional Berhad (TNB). The factor that the researcher had chosen is the internal factor which is Return on Asset (ROA), Return on Equity (ROE) and Net Profit Margin (NPM). This study was analyzed by using Multiple Regression Analysis because it’s involving more than one variables. In the results show that ROA was the factor that give the highest effect to the profitability instead of NPM. For further suggestion, the researcher hopes the future researchers can analyze another factors or variable that contribute to the profitability of TNB.

Literature Review

Profitability

Among several measures of business performance, profitability has been employed in many studies Han (1998), Narver and Slater (1990) Pelham and Wilson (1996) Slater and Narver (1994), especially in those dealing with market-oriented firms because of their long-term focus on profits from Felton (1959). Greenley (1995) taken that many researchers have found consistency between subjective and objective approaches to measuring performance.

Megginson W. L.,Nash R. C., Randenborgh M. V. (1994) claimed that profitability is the best single indicator that suggest an organization is doing things right as well as the primary measure of organizational success. Further, Doyle (1994) pointed out that profitability is the most common measure of performance in Western companies.

Mukhopadhyay A. and AmirKhalkhali A. (2010) pointed out that profit provides the funds for growth. A firm can grow internally through investments in development projects in various ways. For example, it can grow by taking advantage of internal economies of scale, or product and industry diversification, or geographical expansion at home and abroad. It can take advantage of technological opportunities to grow through research and development, leading to product and process innovations. Or, it can grow through mergers and acquisitions. But, in all these cases, availability of internal funds makes it easier for a firm to undertake the growth projects.

Return on Asset

Alrgaibat G.A (2010) had calculated the ROA by dividing a company’s annual earnings by its total assets. Zantioti L. E. (2009) use in ROA in the study as independent variable. However, Alrgaibat G.A (2010), Ben Naceur and Goaied (2008), Kosmidou (2008), and Abbasoglu, Aysan and Gunes (2007), Salavou H. (2002), this study uses ROA as the dependent variable.

Hassan & Bashir (2003) had mentioned in Alrgaibat G.A (2010) that ROA shows the profit earned per dinar of assets and most importantly, it reflects the management’s ability to utilize the banks financial and real investment resources to generate profits.

Asset is one of the internal factors that determine the profitability of a firm. This can be proven with the statement of Larry Wall (1997), a firm’s profitability may be affected by numerous factors including its asset and liability portfolio management, its management, its management’s control over operations costs, its size, the connection in its local market and its luck.

Garner J. L., Nam J. and Ottoo R. E. (2000) agree that such an analysis would link a firm’s growth opportunities to the value of its existing assets. Thus, documented evidence on various cross-sectional relationships cannot be generalized to firms without large amounts of assets in place.

However, previous studies also ignore the relationship between total assets and profit of a company. For instance, Phil Molyneux, D. M. Lioyd, Williams and John Thornton (1992), except the total assets to be negatively related to the total revenue dependent variable since lower capital ratios should lead to higher firm revenue. The asset size of firm is included to take account of scale economies.

Anderson & Reeb (2003) and Costjens, Maxwell & Van der Heyden (2005) conducted empirical research by using accounting measures, such as Return on Assets (ROA). They found significant out-performance using ROA. Furthermore, the higher levels of ROA may be a result of higher effective costs of capital.

Return on Equity

Alrgaibat G.A (2010), Salavou H. (2002) and Zantioti L. E. (2009) also had calculated ROE through net income divided by equity, expressed as a percentage. Zantioti L. E. (2009) also used ROE in the study as independent variable.

The return on equity measures the return earned on the stockholder’s investment in the firm from Gitman (2006).

Al-Hajji, Mohsen (2003) had measured in terms of return on equity and return on total assets, Saudi commercial banks continue to generate some of the highest returns found among the financial institutions in the Gulf Cooperation Council (GCC) region and developed world. (Middle East Economics Digest (2002). González F. also found a positive influence of banks’ equity investments on banks’ profitability.

From Ayayi A. G. (2009) found that equity contract generate more social welfare and profit than debt contract. This indicates that total equity generate more profit. This researcher also claims that to achieve the core objectives, microfinance institutions should nurture micro-enterprises with equity instead of debt and simultaneously target high-ability and low-ability micro-entrepreneurs because the highest profits and social welfare are obtained from the equity’s pooling equilibrium. In this journal also suggest that the ability to replace debt contract with equity contract may lead MFIs to be financially sustainable (profitability).

Net Profit Margin

According to Kemmerer J. E. and Lu J. (2008), pointed out that profit margins will typically swing significantly, from negative initially, to higher margins when the sales are rising, and eventually flatten out and even decline toward negative when the market saturates.

From previous studies Ohlson (1995), Lev and Sougiannis (1996), Aboody and Lev (1998), Ely and Waymire (1999), Goodwin and Ahmed (2006), Kallapur and Kwan (2004) has included net income as independent variable in their research.

A company that has been profitable in the past is more likely to be profitable in the future from Witell L, Kristensson P, Gustafsson A, and Löfgren M.

Research methodology

This chapter will explain the necessary method that will be used to conduct the study. The data and information was collected and analyzed to identify the research objective and question.

Research design

The research will attempt to analyze the relationship between the dependent variable and independent variables. By using the appropriate statistical method, the hypothesis will be tested whether it will be accepted or not. In this study, the statistical tool that will be used is Statistical Package for Social Science (SPSS). This statistical method offers an enhanced understanding of the relationship that exists among variables. The researcher use descriptive study. The purpose is to describe the variables of interest. This research conducted by using cross-sectional which is the data was observed one time only.

Sampling Frame

Sampling frame is the source from annual report of TNB which are from income statement and balance sheet of TNB.

Population

The population can be described as the subjects or participants who will take part in the study. The population must be defined clearly before a sample is taken. The population of this study was covered from annual report of TNB’s profitability, return on asset (ROA), return on equity (ROE), net profit margin (NPM) and from the articles that had been done by other researchers.

Unit of Analysis

The unit of analysis in this study is an organization which is Tenaga Nasional Berhad (TNB).

Type of Research

The research can be classified as a quantitative research because this study is conducted to measure the phenomenon, situation, problem or issue that occurred under this study. The information was gathered by using quantitative variables.

Sources of Data

Most of the data and information from this study were obtained from the secondary data which was the sources were already exists. However there is also data that gathered from primary data. All the data were gathered from the year 1999 to 2010. From this study, the researcher gathered the data from the internal and external sources of the organization such as:-

Primary Data

Encik Ayob bin Din, Pembantu Tadbir Tingkatan Tertinggi from Department Customer Services and Marketing (Perkhidmatan Pengguna dan Pemasaran)

Encik Mat Tajudin bin Ismail, Pentadbir Sistem (System Analysis or SA)

Secondary data: Internal data

Annual report (1999 – 2010) of Tenaga Nasional Berhad (TNB)

Annual reports were gathered from TNB’s website under industrial relations. http://www.tnb.com.my/investors-media/annual-reports.html

Secondary Data: External data

Library books, textbook and references books

These books were used as a reference to any words, term and items in the articles that difficult to understand.

Articles

Most of articles were taken from internet and library. Most of the articles were from Economic, Mathematic and Statistics Journals.

Internet

Internet was used to find the related articles and meanings for better understanding from :-

http://www.emeraldinsight.com

http://www.ebscohost.com

http://www.statdistributions.com/f/

http://www.psychstat.missouristate.edu/introbook/tdist.htm

http://www.ccdconsultants.com/

http://financial-dictionary.thefreedictionary.com/

http://www.investopedia.com/

Data Analysis

The data that had been collected will be estimated by using the multiple regression analysis. The multiple regression analysis is a technique to measure the linear relationship between a dependent variable and the independent variables. To interpret the result in this study, several statistical methods were used such as coefficient of correlation (R), coefficient of determination (R2), T – Statistic (T-stat), F – Statistic (F-stat) and Correlation.

Data Collection

This study use secondary data. The data was retrieved from annual report of TNB. The data covers 12 years of income statement and balance sheet from the year of 1999 to 2010 respectively. From the income statements and balance sheets, the researcher will calculate the independent variables which are return on asset (ROA), return on equity (ROE) and net profit margin (NPM).

Return on Asset (ROA)

ROA gives an idea as to how efficient management is at using its assets to generate earnings. Return on assets indicates the capital intensity of the company, being useful to take into consideration the idea of trying to convert assets into profit. (Monea M., 2009). Calculated by dividing a company’s annual earnings by its total assets, ROA is displayed as a percentage. (Alrgaibat G. A., 2010)

## ROA = Net Income x 100

## Total asset

Return on Equity (ROE)

ROE measures the rate of return on the ownership investments. It measure company’s efficiency at generating profits from each monetary unit or net assets, being one of the most financial ratio, showing how well a company uses investments to generate earnings growth. It is an important ratio for owners and potential investors. (Monea M., 2009) Calculated by dividing a company’s annual earnings by its total equity. ROE is expressed as a percentage.

## ROE = Net Income x 100

## Total Equity

Net Profit Margin (NPM)

Net profit margin shows what percent of profit is made from sales (Monea M., 2009). It’s calculated by dividing the net income by total sales and expressed in percentage.

## NPM = Net Income x 100

## Sales

Data Analysis

Introduction

The multiple regression analysis was used in this study because this study involves more than one of the independent variables. To derive the estimated regression, the computer software is used due to the complex nature of the data and the time required. The data has been analyzed using the Statistical Package for Social Science (SPSS) software. Through this software, the computer can provide the result of standard error, coefficient values, R-squared, T-statistic, F-statistic and Correlation. Therefore, the data will be examined to:

Know how well the independent variables that have been chosen to fit the model using R-squared.

Analyze the relationship between each of independent variables on dependent variable using T-statistic.

Determine the combination of independent variables that can be used as predictors to the dependent variable by applying F-statistic.

Determine the correlation between a dependent variable and the independent variables whether there were positive or negative correlated by using Correlation.

Trend Analysis

Table 1: The Trend of Data

YEAR

PROFITABILITY

(RM in million)

ROA

## (%)

ROE

## (%)

NPM

## (%)

1999

736,300,000

1.62

5.5

6.39

2000

1,573,400,000

3.24

10.66

12.11

2001

2,468,100,000

4.86

14.51

18.04

2002

1,096,200,000

2.09

6.07

7.65

2003

1,464,200,000

2.67

9.32

9.57

2004

1,759,800,000

3.17

10.7

10.64

2005

1,163,600,000

2.08

6.53

6.63

2006

1,535,900,000

2.61

7.72

8.16

2007

3,514,500,000

5.69

14.72

16.42

2008

2,663,600,000

4.2

10.35

11.55

2009

1,070,700,000

1.65

4.06

4

2010

2,708,500,000

4.06

9.47

9.55

The purpose of this trend analysis is to observe the trend of the profitability of TNB as the dependent variable. While, the Return on Asset (ROA), Return on Equity (ROE) and Net Profit Margin (NPM) are as the independent variables that also will be analyzed. This analysis is done based on 12 years period from 1999 until 2010. The trend analysis will be focus on:-

The relationship between profit of TNB and its Return on Asset (ROA) from 1999 to 2010.

The relationship between profit of TNB and its Return on Equity (ROE) from 1999 to 2010.

The relationship between profit of TNB and its Net Profit Margin (NPM) from 1999 to 2010.

The Profitability Trend

Source: Annual Report TNB (1999-2010)

Chart 2: Profitability Trends

Chart above shows the profitability trends of TNB from 1999 to 2010. In 2007 show that TNB had the highest profit from other year. This was driven by various factors such as the implementation of the new tariff structure, foreign exchange translation gains and a 5.3 per cent increase in electricity demand. Net profit increased from RM1, 535.9 million to RM3, 514.5 million. However, the profit was started to go down a little bit in 2008 but still in the third highest driven by the benefit of the stronger ringgit or forex gain and stripping out the increase from the new tariff. The second highest is in 2010, this is due to stronger Ringgit against US Dollar and Japanese Yen. Besides, higher electricity sales because of increasing demand in industry and commercial sector. In 2009 show the lowest profit that the company face. The lower profit was resulted to the higher cost of coal paid to meet rising demand and a weaker Ringgit against US Dollar and Japanese Yen. The second lowest is in 2002, this due to adversely affected by the overall strengthening of the Japanese Yen during the period under review combined with the increase in fuel costs due to the shortage of gas.http://www.bem.org.my/v3/images/relatedlinks/logo_tnb.png

Findings (interpretation of results)

Regression Analysis

Model Summary

Table 2: Model Summary

Coefficient of Correlation (R)

Coefficient of Correlation (R) is used to determine the level of relationship between a dependent variable and the independent variables. The value of the correlation analysis is ranged between -1 (perfect negative correlation) to +1 (perfect positive correlation).

The value is 0.999. The result shows that the correlation between two variables is strongly positive relationship.

Coefficient of Determination (R2)

Coefficient of determination (R2) is used to determine how well the regression fits the data. The objective is to test the goodness of fit.

From the table above, R-squared is 99.8% of the dependent variable (net profit) can be explained by the independent variables (ROA, ROE and NPM). This indicates that the R-squared is near to 100%. So, the model is fit.

The remaining 0.2% cannot be explained by this regression analysis. The factor might be due to other important independent variables which are not being included in this study. Therefore, the regression equation is acceptable.

Adjusted R-Squared

Adjusted R-squared is a standard, arbitrary downward adjustment to penalize for the possibility that, with many independents, some of the variance may be due to chance. More the independent variables will be more the adjustment penalty. Since there are only three independent variables here, the penalty is minor.

ANOVA (Analysis of Variance)

ANOVA was used to test the overall significance of the models which are ROA, ROE and NPM.

Table 3: ANOVA

Significant level of the correlation 0.000, normally written as p < 0.001.

The table above show that the p = 0.001 (p < 0.05), so there are significance different between ROA, ROE and NPM.

Critical F – Value

Table 4: F – Statistic

Model

F – Statistic

F – Value Table

1

1424.80

4.257

Denominator = n-k = 12 – 3 = 9

Numerator = k-1 = 3 – 1 = 2

At 5% of P – value, the critical F – value is 4.257.

Based on the table, the F-Statistic is 1424.8. At 5% of P – Value, the calculated F – Statistic is greater than the F – Value table which is 4.257. Therefore, there is a statistically significant.

Coefficients

Table 5: Coefficients

The equation for Multiple Linear Regression Model:

## Profit = α + β1 ROA + β2 ROE + β3 NPM + ε

Profit = – 40.309 + 96661.897 ROA + 1130.566 ROE

S.E (39.434) (2807.554) (2180.507)

– 12985 NPM

(1532.745)

Table 6: Regression Coefficient

Variable

Regression Coefficient

ROA

96661.897

ROE

1130.566

NPM

-12985.00

Return on Asset (ROA)

When the ROA increases by 1 %, the Net Profit will be increased by RM 96661.90. This indicates that there is a positive relationship between ROA and Net Profit.

Return on Equity (ROE)

When the ROE increases by 1 %, the Net Profit will be increase by RM 1130.57. This indicates that there is a positive relationship between ROE and Net Profit.

Net Profit Margin (NPM)

When the NPM increases by 1 %, the Net Profit will be decreased by RM 12985.00. This indicates that there is a negative relationship between NPM and Net Profit.

T – Statistic

T-statistic is used to determine the significant relationship between the dependent variable with each of the independent variables.

Table 7: T – Statistic

Variable

T-Statistic

T – Tabulated

ROA

34.429

1.8595

ROE

0.518

1.8595

NPM

-8.472

1.8595

Number of observation = 12

Degree of Freedom = number of observation – number of independent variable – 1

= 12 – 3 – 1

= 8

At 95% of confidence interval, the critical T – Statistic was 1.8595.

ROA

Based on the table, the T-Statistic is 34.429. At 95% confidence interval level, the calculated T – Statistic is greater than the T – Tabulated table which is 1.8595. Therefore, there is a significant relationship between ROA and Profitability.

As a result, H1 will be accepted, H0 is rejected.

## H1 : There is positive relationship between profitability and return on asset

ROE

Based on the table, the T-Statistic is 0.518. At 95% confidence interval level, the calculated T – Statistic is lower than the T – Tabulated table which is 1.8595. Therefore, there is an insignificant relationship between ROE and Profitability.

As a result, H1 will be rejected, H0 is accepted.

## H0 : There is no relationship between profitability and return on equity

NPM

Based on the tabl

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