Highlights

• Ministry of Energy, Green Tech and Water, Maixmus Ongkili announced that government will cut tariff in Peninsula Malaysia by an average 2.25sen/kWh from March 1 to June 30, while Sabah and Labuan by 1.20sen/kWh.

• The tariff cut only applies to commercial, industrial and domestic (only those who use >300kWh/mth) users.

• The tariff cut is meant to past back RM727m savings from over-recovery cost for the period Jan-Dec 2014 due to favourable fuel mix and slump in fuel cost. The impact should be neutral to TNB, under IBR structure.

Comments

• We were surprised by the abrupt change in government’s announcement of restated RM727m over-recovery cost from RM824m under-recovery cost in 2014, indicating TNB’s overall cost structure in 2014 was below IBR benchmark by RM727m, which will be pass-back to consumer (vs. initial guided RM824m to be compensated by government).

• Similarly, TNB is likely to have benefitted from higher than management guidance of RM200m of over-recovery cost in previously announced 1Q15 result.

• Hence, we believe the adjusted tariff structure may better reflect TNB’s current fuel cost structure (in terms of lower coal price and higher coal power generation mix).

• By 2H15, we may see the government cutting tariff further on potentially lower LNG pricing (in tandem with the slump in crude oil price), as we understand that Petronas’s contracted LNG price is still fixed at high rate in 1H15 and only due for re-negotiation by 2H15, and hence the delayed adjustment in LNG pricing for TNB (RM46/mmtbu in 4Q14). However, government may allow for adjustment in piped gas price in 2H15 to match the decline in LNG cost.

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

• We have assumed lower average tariff and adjusted FY15- 17 earnings by -7.9%, -3.4% and -2.2% respectively.

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 lower TP of RM17.00 (From RM17.50) based on DCFE.

Source: Hong Leong Investment Bank Research - 12 Feb 2015