Highlights/ Comments

• TNB management has organized a conference call to clarify the recent government’s announcement of tariff cut measures, which has caught everyone by surprise.

• The announced tariff cut of an average 2.25sen/kWh will not affect revenue (still based on 38.5sen/kWh), but will only affect its cost structure (tariff cut will be recognized as rebates to qualified end-consumer).

• The significant variants between the recent Feb-2015 announced RM727m cost over-recovery (to be passed back to consumer) and Nov-2014 announced RM824m cost under-recovery (to be compensated by government through savings from re-negotatied capacity savings) was mainly due to mis-estimations of fuel generation mix, unit fuel cost and cost savings from capacity payments. Feb-2015 announcement was based on Jan-Oct confirmed data and 2 months estimation vs. Nov-2014 announcment based on Jan-Feb confirmed data and 10 months estimation.

• Management also guided that previous RM600m cost under-recovery for FY08/14 was incorrect and the actual number was RM100m cost over-recovery, while 1Q15 guided RM200m cost over-recovery is likely to be higher (no actual figures being revealed as Nov 2015 data have not been verified).

• Tracking back into FY08/14 earnings, TNB estimated its own core profit to be RM5.8-6.0bn (after adjusting for the cost over-recovery of RM100m, tax revision of RM240m, forex gain of RM445m, unrecovered fuel cost share of RM700m prior IBR implementation, LPL writeback of RM350). Should we include base tariff adjustments of 0.9sen/kWh for Sep-Dec 2013 period, core earnings should increase by ~RM200m.

• Despite the lower guided core earnings (from cost underrecovery to over-recovery), we remained positive on TNB’s stable long term growth in line with GDP growth and IBR implementation.

Risks

• Disruption in energy supply (coal and gas).
• Government delay tariff revision.
• Unscheduled power plant shutdown

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 RM17.00 based on DCFE.

Source: Hong Leong Investment Bank Research - 16 Feb 2015