Investment Highlights

• Maintain HOLD on Tenaga Nasional (TNB) with an unchanged DCF-based fair value of RM14.65/share (terminal growth rate: 2.5%, WACC: 7.9%).

• We have reduced TNB’s FY18E net profit by 8.1% to account for the absorption of the RM564mil tariff surcharge for non-domestic customers.

• The Malaysian government has approved the continued implementation of the imbalance cost pass-through mechanism for 1H2019.

• Out of the RM1.82bil additional generation and fuel costs, RM308mil surcharge for the domestic (residential) customers will be funded by the Electricity Industry Fund and RM948mil will be passed on to non-domestic customers (mainly commercial and industrial) via a tariff surcharge of 2.55 sen/kwH from 1 March to 30 June 2019. The tariff surcharge for non-domestic customers will remain at 1.35 sen/kWh from 1 January until 28 February 2019.

• The balance RM564mil, which is also part of the surcharge for the non-domestic customers, will be absorbed by TNB via a cost and revenue adjustment in FY18E. This was agreed upon during the base tariff determination in Regulatory Period (RP) 2 under the incentive-based framework.

• Under the RP2, any excess revenue from the transmission, distribution and customer services units must be passed back to the customers via a cost and revenue adjustment. Sales have been higher than expected due to a more favourable customers mix than the one stipulated under the RP2.

• This development implies that TNB’s earnings may be more volatile in the future. For now, we are still keeping our net profit forecast of RM6.0bil for FY19F. The surcharge of RM564mil will lower TNB’s FY18E net profit by 8.1%.

• On a positive note, coal and LNG prices have softened since hitting their highs on 18 July and 14 September respectively. This should help stabilise TNB’s fuel and generation costs in 1H2019.

• Coal price has eased by 11.7% from a high of US$117.95/tonne on 18 July to US$104.13/tonne on 14 December. LNG price has slid by 19.9% from US$11.805/mmbtu on 14 September to US$9.45/mmbtu on 14 December.

Source: AmInvest Research - 17 Dec 2018