Results

• Within expecations - Reported 1Q17 core earnings at RM2.3bn, which is 27.2% of HLIB?s FY17 estimate, but better than consensus estimate at 30.7%.

Deviations

• None.

Dividends

• None.

Highlights

• YoY: Excluding EI items (RM300m provision) and forex translation, 1QF17 core earnings improved by 14.6% mainly due to improved revenue by 5.3% (driven by higher electricity sales and better sales mix). We have not excluded reinvestment allowance of RM332m in 1Q17 and RM388m in 1Q16.
• QoQ: Despite flat revenue, core earnings improved by 18.6% mainly on lower operating expenses related to repair & maintenance and staff costs provisions.
• Prospects: Our house view is for Malaysia GDP growth to average 4.5% in 2017 (2016e: +4.2%), which may result in stable electricity demand growth. We have only imputed 2.8% growth for FY17 (1Q17: 3.6% in Peninsular M?sia and Sabah).
• Management reassured that ICPT remains in effect and was confident that TNB would not be affected by the recent surge in energy prices i.e. coal price (currently at US$78/mt), gas price (currently at RM21.20/mmbtu) and LNG price (currently at RM28/mmbtu). TNB will either receive higher effective tariff (surplus charge on top of existing base tariff) or in the form of compensation from government. The government still has savings of RM1.4bn from 1st Generation PPAs renegotiation.
• Coal will remain as the major fuel generation, as it is still the cheapest source of energy and its function as base load power generation (due to long startup and cooling period).
• TNB?s new investments into foreign utilities are only expected to contribute positively in FY18, due to startups and restructuring exercises.

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 RM17.00 based on DCFE. We remain positive on TNB?s long term growth and strong cash flow. Shareholders stand to receive higher dividend yields of up to 5% (vs. historical 2-3%) based on the updated dividend payout policy (30-50% of net income).

Source: Hong Leong Investment Bank Research - 25 Jan 2017