Results

• Above expectation - Reported 1Q15 core earnings at RM2.3bn, which is 41.7% of HLIB and 39.0% of concensus.

Deviations

• Lower than expected operational cost (fuel costs) due to improved coal generation mix and lower coal prices.

Dividends

• None.

Highlights

• 1Q15 revenue increased by 15.2% yoy due to tariff adjustments of 14.9% in Peninsular and 16.9% in Sabah effective 1 Jan 2014 (implementation of IBR), as well as higher electricity sales by +2.7% yoy.

• The adjusted 1Q15 EBITDA margin improved 10.9%-point yoy on the back of higher revenue and lower power generation fuel cost mix. TNB reported higher coal power generation (+17.3% yoy) at lower average coal price of RM230.2/mt (-7.6% yoy) and lower gas (+LNG) power generation (-7.8% yoy) with higher average piped gas price of RM15.20 (+10.9% yoy).

• Due to the favourable fuel mix in 1Q15, TNB recorded fuelcost recovery of RM200m (likely to pass-back to consumer in the next tariff review) as compared to fuel-cost underrecovery of RM600m in FY14 (TNB has not recognize the writeback of RM600 pending regulatory review).

• Coal power generation is expected to increase further when TNB’s Manjung 4 coal-fired power plant commence operation by April 2015.

• We believe that government is likely to revise the benchmarked fuel price mix in coming July review, without adjusting the electricity tariff. Piped gas price for electricity is likely to be raised to offset the savings from current low coal price environment. Hence, TNB will be passing the current savings (fuel-cost recovery) back to Petronas/government (in the form of higher gas price), indicating potential lower earnings post July revision.

• Related to recent flashfloods, TNB is still assessing the potential losses. The losses will only be partially covered by insurance.

Risks

• Disruption in gas supply.
• Government delay tariff revision.
• Unscheduled power plant shutdown.

Forecasts

• Increased FY15-17 earnings by 27-29% after accounting for the lower coal price and higher coal power generation mix.

Rating

BUY

Positives

• Implementation of IBR and 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

• Maintain BUY with higher Target Price of RM17.50 (from RM16.00) based on DCFE.

Source: Hong Leong Investment Bank Research - 23 Jan 2015