Results

Below Expectations - Reported 4Q13 core net profit of RM751.8m, bringing FY13 core net profit to RM3.3bn or 92.7% of HLIB’s FY13 forecast (excluding fuel compensation and deferred tax).

Deviations

Higher than expected fuel costs, provisions and tax expenses.

Dividends

Proposed 15 sen final net dividend. Total net dividend for FY08/13 is 25 sen (in-line) or 2.65% net dividend yield.

Highlights

FY13 power demand increased by 3.3% yoy, while revenue increased by 3.6% yoy on higher effective tariff rates (driven by commercial and domestic power demand). Management maintained guidance of 4-5% power generation growth for FY14.

FY13 EBITDA margin increased yoy on the improvement of gas supply since the commencement of Melaka regassification plant in June. However, the burden on the higher LNG cost (RM43/mmbtu) has yet to be finalized by the Energy Commission. Hence, TNB recognized 1/3 of the higher LNG cost in 4Q13, similar to the fuel sharing mechanism (equally shared by TNB, Petronas and GoM), which amounted to RM348.9m to TNB alone.

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

Overall forex gain of RM602.7m in FY13, on strengthening of RM against JPY, which was partly offset by RM weakeness against US$.

According to Energy Commission schedule, Fuel Cost Pass Through (FCPT) mechanism is expected to be implemented in mid 2014, and the Incentive-Based-Regulation (IBR) to be implemented by 2015.

Risks

Downside risks:

1) Disruption in gas supply; 2) Delay in tariff revision; and 3) Indonesia implement tax on coal export.

Forecasts

We have fine-tuned our earnings for FY14 (-0.7%) and FY15 (+0.3%), and introduced earnings for FY16 at RM5.1bn.

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. BUY on Tenaga with higher TP: RM10.35 (from RM10.20) based on DCFE, after accounting for cut in tax rate of 1% from 2016 onwards, as announced under 2014 Budget.

Source:Hong Leong Investment Bank Research - 1 Nov 2013