Investment Highlights

• Tenaga Nasional (TNB) kicks off the year on a fine footing amid uncertainty over the IBR mechanism and its broader implications, which we think are unfounded. Maintain BUY with a DCF-based FV of RM17.46 (WACC: 7.7% TG: 2.0%). We continue to like TNB for its resilient earnings visibility and exciting M&A outlook, including optimisation of its capital structure. Valuations remain compelling at 11.0x CY18 PER.

• TNB’s 1QFY18 core net profit of RM2,037mil, excluding forex losses, is in line with our and consensus expectations at 26% and 28% of estimates respectively.

• There were no dividends declared for the quarter as expected.

• TNB’s 1QFY18 key highlights included: 1. There is a mismatch in comparable periods as Tenaga had a change in its FY year-end to December from August. Therefore, results are not an exact likefor-like comparable. 2. 1QFY18 revenue grew 3.6% YoY. Meanwhile, electricity demand and tariff rates saw 0.4% growth YoY. This is in spite of industrial sales mix advancing to 41.1% in 1QFY18 (vs. 40.7% in 1QFY17). 3. There was an under-recovery of fuel cost amounting to RM634mil for the quarter. The ICPT surplus and PPA savings have been consolidated to the Electricity Industry Fund (EIF), which has sufficient cover for the period of Jan-Jun 2018. The fund has an estimated RM900mil as of end-1Q18. At prevailing fuel prices, the EIF could sustain 1-2 more quarters before it is exhausted by our estimates. 4. Coal plant outage culminated in the utilisation of costlier fuel. Coal-based generation mix dipped to 53.8% in 1QFY18 (vs. 56.9% in 4QFY17). 5. EBITDA rose 11.3% to RM4,222mil as EBITDA margins surged to 34.4% (vs. 32% in 1QFY17). Lower opex spend for the quarter propped margins. However, it is expected to normalise to 33% for FY18 as opex has been backloaded. Core net profit excluding forex gains significantly grew by 40.8% to RM2,037mil.

• In the event of further fuel cost under-recovery come 3QFY18, the EIF may fall into deficit. However, the Incentive-Based Mechanism (IBR) ensures earnings neutrality. The impact to Tenaga, if any, is merely temporary a cash flow impact to Tenaga’s study balance sheet (RM15bil in cash as of end-1QFY18).

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

Source: AmInvest Research - 28 May 2018