Highlights/ Comments

• Under RP1 (2014-2017), TNB enjoyed higher effective base tariff of 39.45sen/kWh (vs. reference rate of 38.53sen/kWh) due to better than assumed sales mix from Commercial segment (see figure #1).
• Under RP2 (2018-2020), Energy Commission (EC) has decided to allow TNB to maintain 39.45sen/kWh as the new reference base tariff rate, assuming the same actual sales mix and no changes to the segmental (i.e. Industrial, Commercial and Domestic) base tariffs.
• Under RP2, energy fuel costs (see figure #2) are higher : 1) LNG: RM35/mmBTU; 2) Gas: RM24.20/mmBTU; (Gas price has been hiked by RM1.50/mmTBU to RM22.70/mmBTU for 1H18) 3) Coal: US$75/MT (RM315.90/MT based on RM4.2/US$).

• However, the assumed generation cost/kWh only increased marginally by 1.1% (0.29sen/kWh) due to improved generation mix assumption from coal energy to 61% under RP2 (see figure #3). Despite the higher assumed coal price at RM315.90/MT under RP2, coal energy is still the cheapest source of energy (see figure #2).
• The 39.45sen/kWh is derived from assumed generation cost of 27.05sen/kWh and revenue of 12.4sen/kWh for regulated TNB’s T&D segment (see figure #4).
• Despite the lower RoA for TNB’s T&D segment at 7.3% under RP2 (vs. 7.5% under RP1), the 12.4sen/kWh revenue is higher under RP2 , mainly attributed to the higher average regulated asset base at RM53bn under RP2 vs. RM42bn under RP1 and higher allowed opex .
• EC further revealed that TNB had underspent the capex and opex to the tune of RM2.4bn under RP1 . TNB will use c.RM1.2bn to implement solar power projects for public universities and education system. The remaining c.RM1.2bn will be channeled to EC, and subsequently being used as part of government’s coffer for tariff subsidies.
• We are positive on EC decision to increase the reference tariff to 39.45sen/kWh to keep its assumption up-to-date with the market reality and enable stable TNB’s earnings.

Risks

• Disruption in energy fuel supply.

• IBR-ICPT suspension.

• Unscheduled power plant shutdown.

Forecasts

• We raised FY18-19 earnings by 3.3% and 3.4%.

Rating

BUY ↔

• TNB’s earnings and cash flow are expected to be stable with the implementation of the IBR/FCPT mechanisms. The lowered 7.3% of regulated assets under RP2 (2018-2020) will be offset by higher asset base, new contributions from associates and power plants.

Valuation

• Maintain BUY with higher TP of RM17.50 (from RM17.00) based on DCFE. We remain positive on TNB’s earnings long term growth and strong cash flow under RP2. Shareholders stand to receive higher dividend yields of up to 5% (vs. historical 2-3%).

Source: Hong Leong Investment Bank Research - 17 Jan 2018