News

• TNB has announced that it has received Notices of Additional Assessment from Inland Revenue Board of Malaysia (IRB), for a sum of RM985.6m for 2013 and RM1,082.6m for 2014. TNB is currently appealling against the notices.

Comments

• The tax assessement sum up to RM2.1bn (37sen/share), out of its latest reported 4Q15 (FYE-August) total cash of RM8.9bn. We note that in the worst case scenario, TNB will have to pay RM2.07bn to IRB and increase its net gearing level to 39.3% from current level of 34.9%.

• We are unsure of the basis for the additional assessment. According to TNB audited account for FY14, there are tax credits related to utilization of reinvestment allowances (RM1.4bn) and income not subject to tax (RM1.0bn).

• With TNB’s good track record for its corporate governance and compliance, we believe TNB’s should not have made such a huge error of RM2.1bn in tabulating the tax credits related to both items which are relatively direct calculations. Hence TNB is appealing against the notice.

• Market has been reacting negatively on the announcement and TNB’s share price has dropped by 24sen or RM1.35bn market cap, equivalent to 65.4% of the potential RM2.07bn additional tax assessment.

• We continue to be positive on TNB given its strong and stable cash flow, protected by the implementation of IBR (incentive based regulation) and FCPT (Fuel cost past through) as well as the cut-off concern on bailing out 1MDBEDRA Energy at high valuation.

Risks

• Disruption in energy supply (coal and gas).
• Government delay tariff revision.
• Unscheduled power plant shutdown.
• Depreciation of RM.
• Increased cost of energy fuel.

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 RM15.80 based on DCFE. We believe the current dip in share price provides a good entry point for TNB.

Source: Hong Leong Investment Bank Research - 1 Dec 2015