Highlights

• Government of Malaysia has announced the continuation of tariff rebate of 2.25sen/kWh for 2H15 in Peninsula Malaysia, under Imbalance Cost Past Through (ICPT) mechanism. Similar to previous round of tariff rebate of 2.25sen/kWh for Mar-Jun 2015, the tariff rebate only applies to commercial, industrial and domestic, consuming >300kWh per month.

• The tariff cut is meant to pass back RM1,085.7m savings from over-recovery cost for the period Jan-June 2015 due to favourable fuel mix (lower utilization of LNG and improved coal power generation) and lower coal cost, and savings from the renewal of 1st generation PPAs (RM300m). The impact is neutral to TNB, under IBR structure.

• At the same time, piped gas price for the power sector will also be revised up to RM16.70/mmBTU from RM15.20/mmBTU effective 1 July 2015.

Comments

• We are neutral on the tariff announcement, as we have already expected the continuation of tariff rebate for 2H15 given the already indicated favourable power generation mix and continued low coal prices of US$60/mt or RM215/mt (vs. benchmarked US$87.5/mt or RM275/mt) in 1H15.

• Despite the higher price of piped gas for 2H15, we expect TNB to continue enjoy lower fuel cost in 2H15 due to the continuation of favourable power generation mix (commencement of Janamanjung 4 in April 2015) and expected low coal price environment in 2H15. Nevertheless, the quantum of tariff rebate for the upcoming review for 1H16 (fuel cost pass through for the period 2H15) may be lower than the current 2.25sen/kWh.

• Overall, the impact of both is neutral to TNB.

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 RM17.00 based on DCFE. We remain positive on TNB’s long term prospect from the implementation of IBR and FCPT. The tariff review (lower or higher) is meant to ensure stable profitability to TNB from being affected by fuel cost fluctuations.

Source: Hong Leong Investment Bank Research - 26 Jun 2015