Results

• Within expectations - Reported core earnings of RM2.0bn for 4QFY17 and RM8.4bn for FY17, which is 100.2% of HLIB FY17 estimate, but better than consensus at 110.5%.

Deviations

• None.

Dividends

• Declared final dividend of 44sen/share. Total dividend for FY17 was 61sen/share in line with our expectation of 60sen/share, but above consensus 50.8sen/share. Management expects dividend quantum to be sustainable given the expected stable earnings (dividend payout based on core net profits including JVs/Associates, but excluding EIs and non-recurring items).

Highlights

• YoY: Excluding EI items, forex translation and deferred tax charges, 4QFY17 core earnings improved by 5.6% mainly on better revenue mix (higher effective tariffs), which was partially offset by higher net finance costs and tax expenses.
• QoQ: Core earnings dropped by 12.2% mainly on higher non-fuel expenses (general expenses), which could not be pass-through.
• YTD: Core earnings was stable at RM8.4bn, as higher operating profit was offset by higher net finance costs and tax expenses.
• Prospects: We expect power demand growth to normalize back to 2.8% annually (vs. GDP growth of 5-5.3%), post a low growth of 0.9% in FY17 due to high base in FY16.
• Earnings is expected to remain relatively stable under IBR/ICPT mechanisms which allow costs pass-through or compensations. Hence, future growth will be driven by asset growth and contributions from JVs/Associates.
• PPA savings fund amounted to RM1.1bn as at end 4Q17 with estimated RM800m to be utilized to compensate TNB for the higher fuel costs.
• The taxation issue with Inland Revenue Board (IRB) remains status quo at current juncture.

Risks

• Disruption in energy fuel supply.
• IBR-ICPT suspension.
• Unscheduled power plant shutdown.
• Lower than expected allowable ROA for Transmission and Distribution segment for the next IBR review in 2018.

Forecasts

• Following the change in TNB’s financial year end to Dec 2017, we adjust our financial forecasts accordingly to accommodate for 4-months FY12/17 and 12-months FY12/18-19.

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 JVs/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 as well as potentially higher dividends.

Source: Hong Leong Investment Bank Research - 27 Oct 2017