Tenaga Nasional (TNB) reported flat net profit of RM1.73bn (-0.1% YoY) in 4QFY17. Stripping out YTD forex gain of RM7.9m, interest payable to government on Power Purchase Agreement (PPA) Savings Fund of RM280m, as well as one-off deferred tax expense of RM300m, core net profit for FY17 declined by 3.2% to RM7.5bn. The results were above our but within consensus’ expectations at 105% and 99% of full year estimates respectively. The discrepancy in our forecast was due to higher-than-expected other operating income. Separately, TNB announced on the revision of its dividend policy to payout ratio of 30%-60% PATAMI (from 30-50% previously) and proposed a final single-tier dividend of 44sen during the quarter, bringing full year dividend to 61sen. We roll-over our DCF valuation, bringing our TP to RM17.02 (previously RM16.16). We continue to like TNB due to its defensive nature and undemanding valuation of 11.0x FY18F EPS. Our Outperform call is reaffirmed.

• FY17 revenue (+6.5YoY). TNB reported higher 4QFY17 revenue, +10.9% YoY to RM12.5bn, bringing its full year FY17 revenue to RM47.4bn (+6.5%). This was due to lower over-recoverability of ICPT recognised during the year amounting to RM227m, compared to an over-recoverability of RM2.8bn in FY16. The electricity demand growth in FY17 continue to normalise with total unit demand for electricity growing only at 1.0% compared to 4.0% in FY16 due to weather pattern, with domestic and commercial demand growing at -2.3% and 1.6% respectively, compared with 11.2% and 6.7% in the same period last year (Figure 1).

• FY17 OPEX (+8.0% YoY). For the full year, operating expenses (OPEX) increased by 8.0% YoY to RM39.1bn due to an escalation of generation costs. This was mainly contributed by higher coal prices (+39.8%), which averaging at RM314.70 per MT (vs FY16: RM231.10/MT) through the year. Higher coal-based generation at 52.7% in FY17 (vs FY16: 50.8%) has also increased its coal consumption by 7.9% to 27.4m MT (vs FY16: 25.4m MT). In addition, its general expenses (+19.8%) as well as subsidiaries cost of sales and operating expenses (+45.0%) also contributed to the increased in OPEX.

• FY17 net profit (-6.3% YoY). During the year, TNB recognised an interest payable to government on PPA Saving Fund in 3Q and 4Q, amounting to RM280m. As at August 2017, the PPA savings fund balance stood at RM1.1bn, which will mainly be used to cover ICPT rebates for 2HCY17. Net profit for FY17 declined by 6.3% YoY to RM6.9bn (FY16: RM7.4bn) mainly due to the increase in finance cost from new borrowings acquired during the year and the increase in deferred taxation expenses due to higher capitalisation of assets.

• Change in FYE. To recap, TNB will change its FYE from 31 August to 31 December. The new FY will end on 31 December 2017covering 4- month financial period from 1 September 2017 to 31 December 2017. Thereafter, the financial year period will revert to 12 months from 1 January to 31 December. We have updated our earnings model and financial summary table based on the 31 Dec year end.

• Revised dividend policy. TNB has revised its dividend policy to payout ratio of 30% to 60% of PATAMI excluding non-recurring items. With that, we are encouraged to increase our dividend payout forecast from 40% to 50% for FY18-19. In addition, the Group also proposed a

final single tier dividend of 44sen for the quarter, bringing full year dividend to 61sen, translating to a payout ratio of 50% of its PATAMI.

Source: PublicInvest Research - 27 Oct 2017