Highlights/ Comments

• TNB is on a restructuring initiative as the company adheres to the fast changing power industry landscape with several policies being put in place by Energy Commission (as well as Kettha) to improve the transparency and competitiveness of the industry, as well as answering to the increasing call for Renewal Energy.

• With the implementation of IBR (incentive base regulation) and ICPT (imbalance cost past through) since 2014, TNB is currently in position to improve its capital structure and dividend payout, due to more stable cash flow. To note, TNB has revised its dividend policy to 30%-50% of the reported consolidated PATMI by end 2016, indicating higher dividend payout (higher dividend yield).

• Nevertheless, there are still uncertainties from the upcoming review of IBR to lower the return for TNB’s Transmission & Distribution segment (currently based on 7.5% of adjusted WACC). While we expect a high chance of lower adjusted return in the upcoming review, we believe TNB’s earnings to be relatively stable in 2018, given the higher asset base and full year contribution from Manjung 5 plant.

• TNB is still open for potential acquisition in foreign power assets as part of its aspiration to become on of the top 10 power company globally by 2025. TNB puts utmost importance in partnering with reknowned local energy players to minimize its exposure toward foreign country risk.

• Notably TNB had established a Multicurrency Sukuk Issuance Programme of US$2.5 billion (through TNB Global Ventures Capital) and drawndown US$750m to finance the acquisition of 30% GAMA Enerji for US$243m, 30% GMR Energy for US$300m and 50% Vortex for UK£86m.

• These acquisitions are expected to be profitable in 2018 and contribute positively to TNB’s bottomline, further allaying investors’ concern on the potential lower earnings from the revision of lower return on WACC under IBR in 2018.

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 - 5 Sept 2017