Results

• Inline - Reported strong 3Q15 core earnings of RM1.5bn, bringing 9M15 earnings to RM4.9bn, achieving 74.4% of HLIB’s forecast and 76.2% of concensus.

Deviations

• None.

Dividends

• None.

Highlights

• Adjusted a lump-sum of RM1.82bn cost over-recovery for the period Jan 2014-May 2015 in 3Q15. Breakdown of of ICPT adjustments for the period:
• 

• Contrary to previous guidance (recognize rebates under cost structure), TNB will recognize the estimated ICPT (cost under-recovery or over-recovery) against its revenue during the respective quarter.

• During 3Q15, TNB has given rebates of RM400m to consumer vs. RM727m budgeted for Mar-Jun 2015. Note that EC has budgeted another RM1.1bn (cost overrecovery) to be given back to consumer for Jul-Dec 2015.

• Despite the commencent of Manjung 4 coal plant in 3Q15, TNB has to rely more on gas-LNG power generation due to plant shutdowns of a number of coal power plants (TNB and IPPs), which is expected to prolong until year end.

• In July, LNG price has been lowered to RM36.7/mmtbu (vs. historical RM45-46/mmtbu and IBR benchmark RM41.68/mmbtu) due to lower crude oil price. The savings from lower LNG price will be pass back to consumer.

• Management foresee no issue on the potential delay in Track 4A project given the slower than expected power demand growth YTD, likely due to slowdown in economy. Management declined to comment on 1MDB-EDRA issues.

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. We believe that TNB is unlikely to buy 1MDB-EDRA at high valuation.

Source: Hong Leong Investment Bank Research - 31 Jul 2015