Results

Above Expectations - Reported 3Q13 core earnings of RM912.0m, bringing 9M13 earnings to RM2.5bn or 83.7% of HLIB’s FY13 forecasted core earnings of RM3bn.

Deviations

Higher than expected effective tariff rates, higher than expected gas supply and strengthening of RM against US$. (lower effective coal price)

Dividends

None.

Highlights

3Q13 power demand increased by 1.7% yoy, while revenue increased by 5.0% yoy on higher effective tariff rates (driven by commercial and domestic power demand) and higher accrual income. There was outage at Pakistan Power plant LPL during the quarter (drag down overall unit power sold).

EBITDA margin dropped 3.3 pct points qoq due to higher utilization of alternative fuels (i.e. distilates and oils) as the power demand peaked in the quarter.

Reported forex gain of RM344.1m in 3Q13, on the strengthening of RM against US$ and JPY.

The Melaka Re-gassification plant has commenced operation since 23 May, ensuring adequate gas supply to the power industry.

TNB will pay the initial gas supply of 1,000mmscfd at RM13.70/mmscfd and any additional supply (agreed supply of 250mmscfd) at market price of RM44-45/mmscfd, which is still lower than distillate and oil costs.

Pending the implementation of tariff adjustments, the additional cost of imported LNG is borned by TNB, Petronas, and government equally. However, the actual formula in calculating the compensation has not been determined at this stage.

There was unscheduled shutdown at Tanjung Bin during the quarter, reducing power capacity payment by RM200m.

Risks

Downside risks:

1) Disruption in gas supply;

2) Delay in tariff revision; and

3) Indonesia implement tax on coal export.

Forecasts

We have increased earnings for FY13 by 17.1% and FY14- 15 earnings by 7.0-10.6%, to reflect the improved gas supply, higher effective tariff and lower coal price.

Rating

BUY

Positives –

• Low coal price at ~US$85/mt.
• Implementation of automatic FCPT mechanism which eliminates uncertainties about future earnings.
• Earnings neutral from the higher LNG charges.

Negatives –

• Utilization of coal-fired power plants have reach limit.
• Decision on tariff revisions depends on the government.

Valuation

We remained positive on TNB on power sector restructuring, ample supply of natural gas and new power plant with higher efficiency. BUY on Tenaga with higher TP: RM10.20 (from RM9.05) based on DCFE.

Source: Hong Leong Investment Bank Research - 19 Jul 2013