Results

• Inline with Expectations - Reported strong 2Q15 core earnings of RM2.4bn, bringing 1H15 earnings to RM4.8bn. However, if we exclude fuel-cost over-recovery of RM1.5bn, core profits would be RM3.3bn, which is 50% of HLIB’s forecast of RM6.6bn for FY15.

Deviations

• None.

Dividends

• Declared single tier dividend of 10 sen.

Highlights

• 1H15 and 2Q15 revenue increased by 10.6% yoy and 6.1% yoy respectively, mainly 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.

• With the improved power generation from coal power (Tg. Bin and Jimah) and hydropower, TNB was less reliance on gas+LNG and alternative energies. EBITDA margin improved significantly to 37.2% in 1H15 (vs. 26.5% in 1H14) and 38% in 2Q15 (vs. 27.4% in 2Q14). Consequently, TNB has guided for fuel cost over-recovery of RM1.5bn (net of tax) for 1H15 (subject to government approvals). Similar to previous annoucement (rebates of RM550m for CY14 for Mar-Jun 2015), the RM1.5bn (to exclude the portion recognized for Sep-Dec 2014) is likely to be pass back to consumers in 2H15 in form of rebates.

• With the commissioning of Manjung 4 (1,010MW) in April 2015, we expect continued high power generation from coal power plant in the coming quarters (further boosted by Tg. Bin Energy commencing in 2Q16), ensuring continued low fuel generation cost structure.

• A quick discussion with management reviewed that power reserve safety margin for CY18 will likely fall below 20%, if track 3B 2,000MW coal power generation (by EDRA-1MDB) failed to take place. Given the risk of potential unscheduled shutdown by some power plants, the reserve margin may fall below 10%. Hence, we believe that Energy Commission will have no choice but to extend some of the upcoming expiring 1st generation PPAs – YTLP, PDP and Powertek.

Risks

• Disruption in gas supply.
• Government delay tariff revision.
• Indonesia implements tax on coal export.

Forecasts

• Unchanged

Rating

BUY

Positives

• Implementation of IBR and FCPT mechanism which eliminates uncertainties about future earnings.
• Earnings neutral from the higher LNG charges.

Negatives

• Unscheduled breakdown of power plants.
• Decision on tariff revisions depends on the government.

Valuation

• Maintain BUY with unchanged Target Price of RM17.00 based on DCFE.

Source: Hong Leong Investment Bank Research - 28 Apr 2015