Investment Highlights

• TNB’s 1QFY18 core net profit of RM1,816mil, excluding forex losses, are in line with both our and consensus earnings estimates, at 24%. Despite this, there were some quarterly deviations from our full-year forecasts: 1. Unit demand only grew 1.2% in 1QFY18, against our full-year forecast of 3.2%. We expect growth momentum to pick up over the remaining quarters as normality should resume in FY18, after a mere 1.0% growth in FY17 against an El-Nino-induced high base. Typical electricity demand/GDP growth multiplier should range between 0.50x and 0.6x. We are keeping our unit demand growth assumption of 3.2% in FY18. 2. Effective tax rate dipped to 2.9% as a lumpy reinvestment allowance was recognised for the quarter. (FY18F: 17.0%). 3. Staff cost spiked 15% due to a cost recognition mismatch. Management expects cost to normalise over the year.

• 1QFY18 revenue rose by 3.3% YoY to RM11,607mil, driven by marginally higher electricity demand (+1.2%) and tariff rates at 39.5 sen/Kwh (+0.2%). Notably, industrial customers grew 4.1% YoY despite Malaysia seeing flash floods in early November. It skewed customer mix unfavourably as commercial segment contracted 2%.

• Total cost grew by 9.3% to RM8,138mil, in tandem with higher fuel cost. Coal fuel cost was c:40% YoY, averaging RM365.40/mmBTU. It is 15% higher than the coal price assumption of RM315.90/mmBTU under RP2 (2018-2020). Any under-recovery of fuel cost overruns will be buffered by savings realised over RP1. It would ensure earnings neutrality to Tenaga from volatile fuel prices.

• As a result, EBITDA rose 1.8% to RM3,862mil. Higher interest cost tied to funding Southern Power Generation and Manjung 5 was somewhat offset by the aforementioned reinvestment allowance. Core net profit excluding forex gains contracted by 7.6% to RM1,816mil.

• We continue to like TNB for its improved earnings visibility and exciting M&A outlook, which is expected to supplement earnings and optimize its capital structure. Furthermore, uncertainty surrounding RP2 should diminish with reasonable new parameters, in our opinion.

• Maintain BUY with a lower DCF-based FV of RM17.46 (from RM17.82) as we roll over our valuations to FY19 but with marginally higher WACC of 7.85% (previous WACC: 7.7, TG unchanged at 2.0%) in accordance with the hike in the OPR. It implies 12.4x FY18F, close to its 5-year historical average of 11.4x. Implied dividend yields for FY18-FY20 remain attractive at 4.8%-5.3%.

Source: AmInvest Research - 29 Jan 2018