News/ Comments

• TNB has announced the adoption of a new dividend policy with effect from current FYE08/17. TNB intends to distribute dividends based on a 30% to 50% dividend payout ratio on the reported consolidated PATMI, excluding extraordinary and non-recurring items. Previously TNB’s dividend policy was based on 40%-60% of its annual free cashflow; (i.e. cashflow from operations less normalised capex and interest servicing).
• We are positive on TNB’s new dividend policy, given that TNB is effectively paying a higher sum to shareholders: - Old dividend policy New dividend policy Based on FY16A Free Cash Flow RM3.0bn Core PATAMI RM8.4bn Dividend Payout RM1.8bn RM2.5-4.2bn* Announced Dividend 32sen 44-74sen* Based on FY17E Free Cash Flow ~RM3.0bn Core PATAMI RM8.4bn Dividend Payout RM1.8bn RM2.5-4.2bn* Announced Dividend 32sen 44-74sen* * Based on HLIB’s estimates
• With the new dividend policy, shareholders are expected to enjoy a higher dividend payout of 44-74sen/share or yield of 3.1-5.3% for FY17E (from 2.3% in FY16A).
• Futhermore, the new dividend policy also takes into account of the consolidated net profit contribution from TNB’s JVs/associates (including its newly acquired GAMA Enerji and GMR Energy).
• We believe the new dividend policy is in line with management’s guidance to improve TNB’s capital structure, while still maintaining sufficient capital/cashflow to cater to its business prospects, capital requirements and growth/ expansion strategy.

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

• Unchanged.

Rating

BUY ↔

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

Valuation

• Maintain Buy with unchanged TP of RM17.50 based on DCFE. We remain positive on TNB’s long term growth and strong cash flow.

Source: Hong Leong Investment Bank Research - 13 Dec 2016