Results

• Below expecations - Reported 1QFY12/17 core earnings at RM1.9bn, which is 66.8% of HLIB’s 4MFY12/17 estimate.

Deviations

• The earnings was dragged by the negative RM175m accrual accounting treatment, higher net interest costs and losses from associates. The negative accrual accounting may be reversed in coming quarters. Associate GMR was unable to pass-through the higher generation costs pending approval from India court (which may drag for a few months).

Dividends

• None. Management indicated that dividend to be proposed in up-coming one month result reporting by end Feb 2018.

Highlights

• YoY: Excluding EI items (RM210m provision and mismatch of expenses) and forex translation gain, 1QFY12/17 core earnings dropped by 18.3%, dragged by negative accrual accounting treatment, associates’ losses and higher costs for operation, depreciation and finance.
• QoQ: Core earnings dropped by 8.4% on higher net finance costs and losses from associates.
• Comments: TNB revealed that return for regulated Transmission & Distribution segment (T&D) was RM967m in the quarter, suggesting the annualized return of RM3.9bn, relatively lower than previously achieved RM4.1bn in FY08/17.
• Under RP1, Transmission was based on revenue cap (revenue and income are fixed and not subject to volume risk) while Distribution was based on price cap (revenue and income are subject to volume risk, while rate is fixed).
• Under RP2, Transmission is still based on revenue cap. However, Distribution is further divided into: 1) Distribution network (based on revenue cap) and; 2) Customer services (based on price cap). Hence, TNB’s earnings for T&D under RP2 will be more stable and less subject to volume risk.
• Management views TNB’s earnings to remain stable with stable electricity demand growth, in line with BNM’s projected Malaysia economy growth of 5-2-5.7% for 2017. We have imputed +2.5% electricity growth for 2018-2019, in line with Energy Commission’s assumption for RP2.

Risks

• Disruption in energy fuel supply.
• IBR-ICPT suspension.
• Unscheduled power plant shutdown.

Forecasts

• We have cut 4MFY12/17 earnings by 12.1% after adjusting for the accrual accounting treatment, associates’ losses and higher finance charges. FY12/18-19 earnings remain unchanged.

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 unhanged TP of RM17.50 based on DCFE. We remain positive on TNB’s earnings long term growth and strong cash flow under RP2.

Source: Hong Leong Investment Bank Research - 29 Jan 2018