Results

• Above expectations - Reported 3Q16 core earnings at RM2.9bn and 9M16 at RM6.5bn which was 87.6% of HLIB’s FY16 forecast and 91.5% of consensus.

Deviations

• Improved revenue mix and lower effective cost of generation from lower fuel costs and improved power generation mix.

Dividends

• None.

Highlights

• Due to El-Nino effect (hot weather), TNB continued to record high power demand growth at +5.5% yoy in 3Q16, with Peninsular at +6.2% yoy (domestic at +16.0% yoy & commercial at +9.1% yoy). TNB has guided that growth is normalizating in recent month on recovery of El-Nino effect.

• 3Q16 revenue increased only marginally by 1.2% yoy (after adjustment for fuel cost over-recovery of 537.6m in 3Q16 and cost under-recovery of RM260m in 3Q15), likely due to new accounting adjustments commenced in 3Q15.

• Nevertheless, EBITDA margin increased significantly on improvements on sales mix (driven by commercial and domestic users, who pays higher tariffs) and improvement in energy generation mix (higher coal power generation) and lower energy costs (lower coal and LNG prices).

• Given the strong result, TNB has taken the opportunity to provide bad debt of RM526m in the quarter. The provisions were related to the receivables from iron and steel industry players, given the on-going tough operating climate.

• TNB’s spent capex remained low in 9M16 as compared to the planned capex (used for IBR benchmarking) by circa 10- 20%. Management expects catch up in capex spending in 4Q16. 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.

• Relating to the issue of additional RM2.1bn tax assessment dispute with IRB and land dispute with YTLP, management guided both cases are pending court hearings. YTLP will have to resolve the land lease issue with TNB first, before commencement of PPA extension.

Risks

• Disruption in energy fuel supply.

• IBR-ICPT suspension.

• Unscheduled power plant shutdown.

• Lower allowable return on assets for Transmission and Distribution segment for the next IBR review in 2018.

Forecasts

• Increase earnings forecasts for FY16 by 11.2%, FY17 by 10.6% and FY18 by 6.9% on the favourable revenue mix and generation mix.

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: RM17.50 (from RM16.50) based on DCFE, after adjusting for higher earnings.

Source: Hong Leong Investment Bank Research - 29 Jul 2016