Highlights/ Comment

• Malaysia’s power demand growth is expected to normalize back to 2.0-2.5% yoy in 2018 , after a weak growth in 2017 (due to high base in 2016 on hot weather from El Nino). The growth is only 0.4-0.5x of the expected Malaysia’s strong 5.3% GDP growth in 2018, as GDP is increasingly driven by services sector (relatively lower energy intensity) and less reliant on manufacturing.

• EC has planned power generation planting up to 2023 . With the slower demand growth, new regional power sourcing (e.g. Laos) and increasing RE initiatives, we do not anticipate new large scale PPA within the next 1-2 years. Hence, IPPs will have to content with existing PPAs.

• Government has decided to maintain the base electricity tariff rate at 38.53sen/kWh for IBR under RP2 (regulatory period 2). The new RoA is set within 7.0-7.5% under RP2 (vs. 7.5% under RP1), indicating higher power generation cost assumptions under RP2 (vs. RP1).
• We estimated the lower RoA at circa 0.0-0.8sen/kWh, in line with the estimated higher power generation costs of 0.7sen/kWh (to maintain base tariff rate). The lower RoA is immaterial to TNB’s bottomline, which can be easily offset by the higher asset base, contributions from Manjung 5 and foreign ventures.
• On currency effect of RM appreciation , it is positive for TNB given loan exposure of RM6.6bn denominated in US$ and RM2.9bn denominated in JP¥ and lower maintenance costs. On the other hand, YTLP is affected through lower RM translation contribution from foreign operations – Singapore Seraya and UK Wessex.

Risks

• Surge in global energy prices (gas and coal).

• Supply shortage of energy fuel (gas and coal).

• Unscheduled power plant outage.

• Depreciation of RM.

• Discontinuation/suspension of IBR/FCPT mechanisms.

Forecasts

• TNB: Cut earnings for FY18-19 by 0.1% after taking into account of lower power demand, stronger RM and new IBR.

• YTLP: Cut earnings for FY18-19 by 8.0% and 3.0% respectively after cutting RM denominated earnings from foreign operations.

Rating

Overweight ↔

• Despite being pressured by increasing energy costs, we believe power industry is protected under PPA, IBR and ICPT mechanisms, which provide for stable regulated earnings and margins for the industry.

Valuation

• Maintain Buy on Tenaga with unchanged TP of RM17.0 0 based on DCFE. We remain positive on TNB’s long term growth and strong cash flow. The recent change in dividend payout policy will improve dividend yields.

• Maintain BUY on YTLP with lower TP of RM1.45 (from RM1.60) based on SOP , as we believe earnings have bottomed.

Source: Hong Leong Investment Bank Research - 8 Jan 2018