Investment Highlights

• Tenaga Nasional Berhad (TNB) announced its results, covering a period of 4 months from Sep to Dec 17. This is in tandem with the change in its financial year-end to 31 Dec from 31 Aug. We maintain our BUY recommendation and DCF-based FV of RM17.46 (WACC: 7.85%, TG: 2.0%).

• 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. The absence of catalytic M&As could offset by an upside to dividend yields. Implied dividend yields for FY18-FY20 remain attractive at 4.8%-5.3%.

• A final dividend for the period amounting to 21.4 sen/share was declared. It is a payout of 50%. While this represents the third interim payout for FY17 (Aug YE) and the period Sep-Dec 17, it is not a switch to more frequent payouts from the usual two interim payouts. TNB intended to appropriate dividends to the applicable FY. Dividend policy payout remains between 30% and 60%.

• The key Sep – Dec 17 period ended highlights are: i) Unit demand growth for the period ended grew 1.6% YoY (vs FY17: 1.0%). We believe flash floods in Nov may have weighed on electricity consumption while FY17 soft growth was against a high 2016 El-Nino inflated base. For FY18 (Dec YE), we believe unit demand will pick up to 3.2% on the electricity demand/GDP growth multiplier in Peninsular Malaysia which has been close to 0.5x-0.6x against our FY18F GDP house assumption of 5.5%. ii) Commercial sales mix was at 40.8% (vs 4QFY17: 39.3%), registering -1.2 YoY for the period. We have assumed for a commercial/industrial/domestic mix of 40%/36%/19%. While higher commercial sales mix results in better margins for the year, it would be subsequently factored in to the following IBR period removing any excesses in profit. iii) Coal fuel cost for the period ended averaged RM363.4/MT. It is 15% higher than the Regulatory Period 2 (2018-2020) benchmark price of RM315.90/MT. Any deviations from the fuel cost benchmark will be netted from a balancing fund, ensuring earnings neutrality to TNB.

• While we maintain our earnings, we take this opportunity to introduce Dec year-end forecasts for the period of FY18F-FY20F.

Source: AmInvest Research - 1 Mar 2018