Results

• Within expectations - Reported 2Q16 core earnings at RM1.6bn and 1H16 at RM3.6bn which was 48.6% of HLIB’s FY16 forecast and 52.5% of consensus.

Deviations

• None.

Dividends

• Declared 10 sen net interim dividend.

Highlights

• Due to El-Nino effect (hot weather), TNB recorded high power demand growth at +4.5% yoy in 2Q16 , with Peninsular at +4.0% yoy (Domestic at +12.0% yoy & Commercial at +6.1% yoy) and Sabah at +16.4% yoy.

• 2Q16 revenue increased by 13.0% yoy (after adjustment for fuel cost over-recovery of RM713.1m in 2Q16 and RM1.3bn in 2Q15), higher than the 4.5% yoy increase in electricity sales, due to lower tariff rebates and improved revenue mix (driven by commercial and domestic segments).

• Margin stayed relatively flat yoy at circa 30% range, post implementation of IBR-ICPT (effective 1 Jan 2014), ensuring stable and predictable earnings to TNB. The qoq drop in margin was mainly due to timing of expenses (usually lower in 1Q of the year).

• At the moment, TNB’s capex spent was slower than the planned capex (used for IBR benchmarking) by circa 10- 20%. Management indicated TNB will be able to keep the capex savings (higher return on asset base) and not pass back to consumers for the next review of IBR in 2018.

• On the issue of additional RM2.1bn tax assessment dispute with IRB, it remained status quo pending date fixture for the hearing in high court. TNB has not provided provisions under its books, indicating potential reversal of decision.

• Acquisition of 30% stake in Gama Enerji for US$255m (RM1,020m) was completed in April 2016. TNB indicated that it does not need to inject further funds into the associate for the upcoming Kirrikale CCGT power plant by 4Q16. However, management indicated minimal contribution from Gama Enerji in the near term.

Risks

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

Forecasts

• Unchanged.

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 unchanged TP: RM16.50 based on DCFE.

Source: Hong Leong Investment Bank Research - 28 Apr 2016