Investment Highlights

• TNB clocked a 4QFY17 core profit of RM1.733bil (QoQ: - 8.8%, YoY: -7.3%) bringing FY17 core profit to RM7,046bil (YoY: -8.8%). This was in line with our expectations but missed consensus estimates by 7%.

• A final dividend amounting to 44 sen/share was declared, bringing its total dividends to 61 sen/share for FY17 (FY16: 32 sen/share).

• Revenue for the year grew 6.5% amid 4QFY17 revenue growth of 10.9% YoY. Top line for the quarter was primarily driven by an over-recovery of higher fuel cost and accelerating unit demand sales, specifically the industrial segment.

• FY17 unit demand growth of 1.0% decoupled from the typical electricity demand/GDP growth multiplier of 0.8- 0.9x due to an El-Nino distorted FY16. However, we expect unit demand growth to resume normality, and grow in tandem with GDP growth pacing ahead. We factor in a 3.2% unit demand growth for FY18F.

• While we expect FY18F coal cost to persist at a 25% premium to FY17 amid ICPT and PPA saving fund projected surplus of RM0.3bil (Dec-17), TNB will remain financially neutral from any generation and fuel cost variations through the ICPT mechanism.

• Key briefing highlights include:

    1)TNB is adopting a more aggressive dividend payout policy of 30-60% from 30-50%. It may be an exercise by TNB to raise its borrowing level to           lower its cost of capital.

    2)Management guided for effective tax rate to gradually normalise to mid-20s by FY19F as the reinvestment allowance diminishes over FY18F.

• We make no significant changes to our FY18/19F forecasts estimates as earnings were within our expectations. Key risks to our forecast include a slowdown in economic growth and unscheduled plant outages.

• Maintain BUY with a higher DCF-based FV of RM17.82 (from RM17.55) as we roll forward our valuations to FY18F (WACC: 7.7% terminal growth: 2.0%). The release of the new regulatory period 2 parameters in December may remove uncertainty clouding TNB’s firm fundamentals. Resilient earnings visibility, robust balance sheet and exciting M&A outlook should prove TNB attractive. Valuations remain compelling at 10.7x FY18F PER with a decent dividend yield of 4.8-5.3% for FY18-20F.

Source: AmInvest Research - 27 Oct 2017