Highlights

• Responding to changes in the global economic landscape (lower crude oil price and RM depreciation), PM Najib has announced a number of proactive measures to ensure Malaysia’s economy growth and development.

• Key Highlights: 1. Postpone the scheduled electricity tariff hike in 2015. 2. Postpone the scheduled gas price hike for the industrial sector in 2015.

Comments

• The announced first measure is relatively in-line with our expectation (refer to Power Industry Outlook 2015 dated 6 Jan 2015). Tenaga is in an advantage position to benefit from the improved fuel mix (improving coal power generation) and lower energy cost (coal, LNG and alternatives) despite RM depreciation in 2015. We have estimated Tenaga to enjoy net fuel cost savings of RM310m in 1H15 and RM703m in 2015 (assuming no change to piped gas price).

• Given the announced postponement of gas price hike only applicable to industrial sector, we believe power industry i.e. TNB may face the risk of potentially gas price hike in upcoming June review. Nevertheless, we have estimated that government has a leeway to increase gas price by RM3.00/mmbtu (currently RM15.20/mmbtu) while maintaining the current tariff rate, implying TNB to pass back the initial fuel cost savings of RM310m in 1H15 back to consumer in 2H15.

• Note that government has previously agreed to compensate RM848m for TNB’s cost under-recovery in 2014 (due to higher than expected fuel cost mix without tariff adjustment), indicates government’s commitment to protect TNB’s interest, in tandem with IBR’s objective.

Risks

• Disruption in energy supply (coal and gas).
• Government delay tariff revision.
• Unscheduled power plant shutdown.
• Depreciation of RM.
• Increased cost of energy fuel (coal, gas, LNG and alternatives).

Forecasts

• Unchanged.

Rating

BUY

Positives

• Implementation of IBR and FCPT mechanism which eliminates uncertainties about future earnings.
• Improved power generation from coal-fired power plants.
• Low coal price environment.

Negatives

• Decision on tariff revisions depends on the government.
• Depreciation of RM against US$.

Valuation

• Maintain BUY with unchanged TP of RM16.00 based on DCFE.

Source: Hong Leong Investment Bank Research - 21 Jan 2015