Highlights

• Ministry of Energy, Green Technology and Water (KeTTHA) has announced a tariff rebate of 1.52sen/kWh for 1H16 in Peninsula Malaysia, following a net savings of RM762m in 2H15. The rebate is a reduction of 0.73sen vs. previous 2 rounds of tariff rebate of 2.25sen/kWh. The tariff rebate only applies to commercial, industrial and domestic (consumes >300kWh per month).

• Despite the lower coal prices and LNG prices in 2H15, the quantum of tariff rebate was lowered due to the effective pass-through of higher RM18.20/mmBTU piped gas price (from RM15.20/mmBTU) for 1H16 to consumers. Note that previous round of higher gas prices by RM1.50/mmBTU (differences for RM16.70/mmBTU and RM15.20mmBTU) for Jul-Dec 2015 was absorbed by government.

Comments

• We are neutral on the lower tariff rebate announcement, TNB only pass-through any costs-savings (vs. benchmark) to end consumer (i.e. TNB’s margin is fixed per unit of power generation sales).

• Due to the effective pass-through of higher piped gas price to RM18.20/mmBTU (from RM15.20/mmBTU), the overall tariff rebate quantum has been reduced substantially (despite the lower coal prices and LNG prices). With the expectation of continued hikes in piped gas price for next tariff review (until it match current market LNG price; currently RM31.70/mmBTU), the overall tariff rebate may subsize further (i.e. effective tariff rate may increase).

• TNB may be affected in view of lower net power demand due to effective higher tariff to end consumers.

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 energy 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, given TNB’s position is being protected by fluctuations of energy prices under IBR and FCPT.

Source: Hong Leong Investment Bank Research - 9 Dec 2015