Results

Within Expectations - Reported 1Q14 core earnings of RM1,054.5m (Excluding fuel compensation of RM184.9m net of tax and deferred tax gain of RM234.7m), which achieved 24.2% of HLIB’s FY08/14 forecast and 22.4% of concensus.

Deviations

None.

Dividend

None.

Highlights

1Q14 Revenue increased by 5.0% yoy due to combinations of higher average tariffs (better sales mix), higher electricity sales and stronger contributions from other segments.

Despite higher usage of LNG (average price at RM45/mmbtu), EBITDA margin still improved slightly mainly due to lower IPPs payments, from unplanned shutdown of Tanjung Bin and Jimah coal power plant. Management was unable to provide guidance on the shutdown period of these coal plants, suggesting continuous usage of higher priced LNG. The average fuel cost for LNG is at 40 sen/kWh vs. coal at 11 sen/kWh.

The current reporting 1Q14 has yet to take into account IBR implementation, which was effective only on 1 Jan 2014. Hence, the higher cost of LNG usage was being borne equally by TNB and Petronas. The amount recognized for LNG usage in 1Q14 was RM600m (inclusive of RM130m from 4Q13). We expect earnings improvement post IBR implementation. The potential higher usage of LNG will likely to be recovered through FCPT, which will be reviewed every 6 months interval.

The appreciated of RM against US$ and JP¥ in 1Q14 had benefited TNB through its exposure to US$ loan of RM2.67bn and JP¥ loan of RM3.45bn. As a result, it reported forex gain of RM260.8m in 1Q14.

We remained bullish on TNB due to the implementation of IBR, which ensures its earnings and cashflows, and eliminate risks from fluctuating total fuel costs.

Risks

• Disruption in gas supply.
• Government delay tariff revision.
• Indonesia implements tax on coal export.

Forecasts

Unchanged

Rating

BUY

Positives –

• Implementation of IBR and FCPT mechanism which eliminates uncertainties about future earnings.
• Earnings neutral from the higher LNG charges.

Valuation

Maintain BUY with unchanged Target Price of RM13.15 based on DCFE. 

Source: Hong Leong Investment Bank Research - 24 Jan 2014