News

• TNB’s wholly owned REMACO (TNB Repai and Maintenance) has been awarded a contract for the Operation and Maintenance (O&M) of 1,223MW Balloki Combined Cycle Gas Turbine Power plant in Punjab, Pakistan.

• The plant is currently under construction and targeted to commence operation by Jan 2018.

• The contract is estimated to be worth US$176m (RM770m) over a period of 12 years.

• The contract marks a new milestone for REMACO as it is the largest O&M contract for a single power plant, locally and internationally.

• REMACO’s other O&M contracts in Pakistan are for Liberty Power Plant, Narrowal Power Plant and New Bong Escape Hydro Power Plant.

Comments

• We are positive on the news as the contract marks another step forward for TNB to expand its non-regulated revenue/income. TNB registered RM2.4bn non-regulated revenue for FY08/16, lagging behind its initiative to boost the segment to RM5bn.

• REMACO has a strong track record in servicing Malaysia power plants (including TNB’s and IPPs), as well as winning some contracts in the international arena such as Pakistan, Myanmar, Indonesia etc.

• However, the contribution from this contract is expected to be marginal. Assuming the EBIT margin of 20-30%, the annual contribution from this contract will be circa RM12- 20m, as compared to TNB’s annual earnings of circa RM8bn.

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. Shareholders also stand to benefit from higher dividend payout.

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 - 9 May 2017