Highlights

• Government of Malaysia announced the continuation of tariff rebate of 1.52sen/kWh for 1H17 (vs. 1.52sen/kWh in 1H16 and 2H16) 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 RM766.33m savings from over-recovery cost for the period Jul-Dec 2016 arising from favourable fuel mix (lower utilization of gas/LNG and improved coal power generation) and lower energy prices of LNG; and 2) hikes in natural gas price to RM21.20/mmBTU from RM19.70/mmBTU effective 1 Jan 2017 (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 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 piped gas price every 6 months and recent surge in imported coal prices (further exacerbated by RM depreciation against US$), we expect TNB to incur higher generation costs in 1H17.
• Nevertheless we are not overly concerned on the higher fuel costs, given that TNB will be able to pass through the higher costs to end users under IBR/FCPT mechanism. Hence, we expect the quantum of tariff rebates for the next review in 2H17 to be potentially lower (than 1.52sen/kWh), to reflect the higher generation costs. Overall, the impact of higher energy costs will be neutral to TNB.

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/ICPT 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. The recent announced change in dividend policy for FY08/17, has reinforced our BUY recommendation on higher dividend payout as part of TNB’s capital restructuring exercise. Shareholders stand to receive higher dividend yields of up to 5% (vs. historical 2-3%).

Source: Hong Leong Investment Bank Research - 15 Dec 2016