Highlights

• Government of Malaysia has announced the continuation of tariff rebate of 1.52sen/kWh for 2H16 (vs. 1.52sen/kWh in 1H16) in Peninsula Malaysia, under Imbalance Cost Past Through (ICPT) mechanism. Similar to previous rounds of tariff rebates, the tariff rebate only applies to commercial, industrial and domestic, consuming >300kWh per month.

• The tariff rebate is determined after taking into consideration of: 1) passing back RM758.03m savings from over-recovery cost for the period Jan-June 2016 due to favourable fuel mix (lower utilization of LNG and improved coal power generation) and lower energy prices of LNG and coal; and 2) hikes in natural gas price to RM19.70/mmBTU from RM18.20/mmBTU effective 1 July 2016, in line with government’s intention to reduce subsidies burden.

Comments

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

• With the ongoing hikes in the price of piped gas every 6 months, we expect TNB to incur slightly higher generation costs. However, this is partially offset by lower LNG prices and favourable power generation mix (commencement of Tanjung Bin Energy in April 2015). Hence, the quantum of tariff rebates for the next review in 1H17 is potentially lower, to reflect the higher generation costs. Overall, the impact of both is neutral to TNB.

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 –

• Additional tax assessment of RM2.1bn.

Valuation

• Maintain Buy with unchanged TP of RM16.50 based on DCFE. We remain positive on TNB’s long term growth and strong cash flow.

Source: Hong Leong Investment Bank Research - 30 Jun 2016