Results

• Within expecations - Reported core earnings of RM1.8bn for 2Q17 and RM4.1bn for 1H17, which is 48.1% of HLIB’s FY17 estimate, but better than consensus at 53.3%.

Deviations

• None.

Dividends

• Declared interim dividend of 17 sen/share, a yield of 1.2%.

Highlights

• YoY: Excluding EI items (RM220m of provision and accounting adjusments) and forex translation, 2QF17 core earnings improved by 11.2% mainly due to improved revenue by 6.4% (driven by higher electricity sales and better sales mix). We have not excluded reinvestment allowance of RM187m in 2Q17 and RM52m in 2Q16.

• QoQ: Lower revenue on seasonally qoq lower electricity demand. Core earnings declined by 22.8% mainly on lower revenue and higher operating expenses related to repair & maintenance, depreciation and others.

• YTD: Core earnings improved by 13.1% on higher demand of electricity (+2.1%) and improved average tariff (on better sales mix contribution from Commercial and Domestic).

• Prospects: The demand for electricity has normalized in 2Q17 (after El-Nino effect) and management expects the electricity demand growth to achieve 4.3%-4.8% in 2017.

• Cost over-recovery (ICPT) has dropped to RM191.1m in 2Q17 (from RM604.8m in 1Q17) on higher fuel costs from piped gas price, higher average coal prices and weak RM. We expect ICPT will breakeven or even turn to cost under recovery in coming quarters. Management remained confident that ICPT is intact and TNB would not be affected by the surge in energy prices.

• TNB will either be allowed for a tariff hike or receive compensation from government (funded by the savings of RM1.5bn from 1st Generation PPAs renegotiation).

• Regarding the taxation issue with Inland Revenue Board (IRB) and land issue with YTLP, both remain status quo at current juncture. Management remained confident on its case against IRB and has continued to recognize investment tax allowance in recent quarters.

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.

Source: Hong Leong Investment Bank Research - 28 Apr 2017