Results

• Within expectations - Reported 4Q16 core earnings of RM1.9bn and FY16 of RM8.4bn which was within our expectation of RM8.2bn (102.7%), but above consensus RM7.3bn (115.6%).

Deviations

• None.

Dividends

• Proposed final dividend of 22 sen/share. Total dividend for FY16 is 32 sen/share, below our expectation of 35 sen/share.

Highlights

• YoY: Core earnings dropped by 5.0% on higher operating costs (mainly due to higher capacity payments to IPPs – Tanjung Bin and Jimah).

• QoQ: Core earnings dropped by 32.8% as EBITDA margin normalized back to 32.1%, on higher operational costs and depreciation charges.

• FY16: Core earnings jumped by 14.0% on higher electricity demand (+4.2%) and lower operational costs.

• Outlook: With Malaysia GDP growth projected between 4- 5% for 2017, we expect domestic electricity demand growth to be relatively resilient at 3%. TNB’s earnigns prospects for FY17 will be supported by the implementation of IBR/FCPT mechanisms and the recognition from newly acquired associates – GAMA Energy and GMR Energy (to complete by Nov 2016).

• Under IBR/FCPT mechanisms, TNB’s domestic earnings is protected from the fluctuation of fuel cost (i.e. coal, gas and LNG) through tariff adjustments for every 6 months. Hence the recent sharp rise in coal cost will not affect TNB.

• Major concern on TNB includes potential revision of lower return of regulated asset by start of 2018. However, TNB’s earnings is expected to be relatively stable given the enlarged regulated asset by 2017 as well as new contributions from Manjung 5 (2017) and Jimah East (2019).

• 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.

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

• Earnings forecasts for FY17/18 raised by +2.4% and +0.5%. We introduce FY19 forecasted earnings at RM8.4bn.

Rating

BUY ↔, TP: RM17.50 ↔

• TNB’s earnings and cash flow are expected to be stable due to the implementation of IBR/FCPT mechanisms. The expected IBR revision to lower return on regulated assets by 2018 will be offsets by new contributions from associates and power plants.

Valuation

• Maintain BUY with unchanged TP: RM17.50 based on DCFE.

Source: Hong Leong Investment Bank Research - 28 Oct 2016