Highlights / Comment

• Coal price has dropped to below US$65/mt, benefit ting Malaysia power industry, through lower feed-in coal fuel cost. In Malaysia, TNB is the only beneficiary of lower coal price as it underwrites the price volatility of fuel input costs for the IPPs. We estimated a cost savings of RM667.8m based on TNB’s FY14 operations.

• However, RM has also depreciated considerably against US$ (currently at RM3.50/US$), partly offset ting the lower US$ denominated coal price. Based on TNB’s FY14 operations, TNB may incur incremental cost of RM417.5m (RM382.1m from coal cost and RM35m from interest on US$ denominated borrowings).

• In 2015, we expect increasing power generation from coal-fired power plants given the operation recovery of both Tanjung Bin 2,100MW and Jimah 2,100MW plants as well as the operation commencement of TNB’s owned Janamanjung 4 1,000MW coal-fired power plant by Apr 2015. Hence, TNB will enjoy lower fuel cost mix in 2015 from higher generation of coal (10.3sen/kWh) and lower generation from gas+LNG (19.6sen/kWh) and other alternatives (Oil: 55.9sen/kWh and distillate: 82.7sen/kWh).

• We estimated TNB to enjoy net fuel cost savings of RM310m in 1H15 and RM703m in 2015 (prov ided piped gas price stay at RM15.20/mmbtu on the next tariff review).

• The government is committed to implement IBR in 2015, after announcing current tariff structure (and piped gas price) to maintain until Jun 2015 (next tariff revision date). IBR platform will provide earnings and cashflow certainties to TNB. TNB’s cost under-recovery in 2014 of RM848m will be compensated by the government, indicating the latter’s commitment to protect TNB’s interest.

• The expected listing of pure IPP players - Malakoff and 1MDB by 2Q15 will likely excite the market and provide investors with wider investment choices in Malaysia’s defensive power industry. Technically , TNB is the only investment play in the industry, while YTLP is likely to be out of the industry when its 2 power plants expire by Sep 2015.

• Furthermore, there is potential P/E re-rating for the industry with the listing of both Malakoff and 1MBD.

Risks

Downside risks –

• Surge in global energy prices (natural gas and coal).
• Supply disruption of energy resources.
• Depreciation of RM.

Forecasts

• We have fine-tuned our models with TNB’s FY15-17 earnings increased by 1.7-2.5% and YTLP’s unchanged.

Rating

• Overweight

Positives

• 1) Expect continued economy growth albeitslower pace; 2) Lower coal cost; and 3) Implementation of FCPT and IBR.

Negatives

• Depreciation of RM against US$.

Valuation

• Maintained Buy on Tenaga with higher TP of RM16.00 based on DCFE.
• Maintained Hold on YTLP with unchanged TP of RM1.44 based on SOP.

Source: Hong Leong Investment Bank Research - 6 Jan 2015