Highlights

• Government has announced the continuation of tariff rebate of 1.52sen/kWh and effective tariff of 37.01sen/kWh in Peninsula Malaysia in 1H18 and continuation of 38.53sen/kWh base tariff under IBR RP2. The government will subsidise the differential of RM929.4m (vs. RM1.3bn in 2H17) for the higher fuel costs vs. benchmark fuel costs: 1. RM144.6m for higher fuel energy costs in 2H17 due to higher coal costs, weakened RM and higher gas prices against the IBR benchmark prices for 2014-17; 2. RM784.8m for cost to maintain the current tariff rebate of 1.52sen/kWh in 1H18 (vs. benchmark 38.53sen/kWh).

• The indicated RoA for T&D segment has been revised lower to 7.0-7.5% in RP2 (2018-2020) from existing 7.5% in RP1 (2014-2017). No further details were made available.

• Moreover, there was no mention of gas price hike in 1H18.

Comments

• We are neutral on the tariff rebate announcement, as TNB will get compensation of RM0.9bn from the government in order to cover its higher energy fuel costs under the Imbalance Cost Past Through mechanism. We have already assumed lower RoA for coming period 2018-2020.

• The announcement will allay investors’ concerns on government’s commitment in honouring IBR and ICPT mechanisms even in the event of high fuel costs.

• The actual tariff rate is supposed to be 38.81sen/kWh (vs. benchmark 38.53sen/kWh) due to the higher fuel costs. However, the government has decided to maintain the tariff at 37.01sen/kWh and bear the differential of 1.80sen/kWh (amounting to RM0.9bn in total costs).

• At current juncture, coal price is relatively high at US$75- 80/mt while RM has appreciated to RM4.10/US$ (from peak of RM4.50/US$ in Jan 2017). However, gas price is expected to be hiked further by RM1.50/mmbtu for every 6 months until market price of RM35/mmbtu is matched.

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%).

Source: Hong Leong Investment Bank Research - 27 Dec 2017