Results

• Above expecations - Reported 1Q16 core earnings at RM2.0bn, which is 27.7% of HLIB’s FY16 forecast and 29.6% of concensus.

Deviations

• Higher margins due to better than expected generation mix.

Dividends

• None.

Highlights

• 1Q16 revenue increased by 6.2% yoy (after adjustment for fuel cost over-recovery of RM681.8m in 1Q16 and RM486m in 1Q15), higher than the 4.2% yoy increase in electricity sales, due to improved revenue mix (driven by commercial segment). Peninsular power demand increased by 3.2% yoy, slightly higher than our assumption of 3.0%. However, management guided for lower growth after the announced revised budget cut by government on 28 Jan 2016.

• Margin stayed relatively flat yoy and qoq at 30-32% range, post implementation of IBR-ICPT (effective 1 Jan 2014), ensuring stable and predictable earnings to TNB. Note that the accounting for ICPT only become effective in 3Q15.

• With the expected commencement of Tg Bin Energy (1,000MW) by March 2016, coal generation mix is expected to increase further and lower overall fuel costs. Coal procurement is expected to increase to 28.8mt in FY16 vs. 22.2mt in FY15. In 1Q16, generation cost for coal was 11.1sen/kWh vs. gas (including LNG) at 16.1sen/kWh.

• On the issue of additional tax assessment dispute with IRB (Inland Revenue Board), TNB has applied for stay order with the high court (hearing expected in 2Q16) to prevent IRB from pursuing collection of the tax amount of RM2.1bn and judicial review on the merit of the tax assessement with another court.

• Acquisition of 30% stake in Gama Enerji expected to complete by March 2016, currently pending approval from both Turkey and Malaysia governments

Risks

• Disruption in energy fuel supply.
• IBR-ICPT suspension.
• Unscheduled power plant shutdown.

Forecasts

• Increased FY16-18 earnings by 2.3-2.5% after accounting for higher margin assumptions.

Rating

BUY

Positives

• 1) Implementation of IBR and FCPT mechanism which eliminates uncertainties about future earnings; and 2) Higher coal generation mix to improve margin.

Negatives

• 1) Additional tax assessment of RM2.1bn.

Valuation

• Maintain BUY with higher TP: RM16.50 (from RM15.80) based on DCFE, after earnings adjustment. The complete acquisition of 30% stake Gama Enerji by March 2016 may provide further upside to valuation.

Source: Hong Leong Investment Bank Research - 29 Jan 2016