Positive Surprise From Higher DPS

FY17A net profit at RM6,904m is below consensus but within our expectation, as it constitutes 91% and 99% of street and our forecasts respectively. The proposed final DPS of 44sen did, however, come as a positive surprise, as full-year DPS at 61sen is above the 51sen consensus is expecting. We view the decision to pay out at the higher end of the pay-out range as positive, as it indicates that management is confident that the ICPT mechanism will continue smoothly despite the uncertainty pending GE-14.

Higher Dividend Payout Reinforcing That ICPT Is Intact

Apart from announcing a higher dividend for FY17A (pay-out ratio of 50%), the board has also decided to increase the current dividend pay-out range from the 30-50% currently to 30-60%. During the analyst call, management also guided that the current pay-out is sustainable, indicating their confidence that the mechanism will continue, in our view. There could also be upside risk to our numbers, as our DPS is based on a 45-50% pay-out ratio.

One-off in 3QFY17A Impacted Overall FY17A Profitability

Net profit for the 4QFY17A is down 2.4% yoy, mainly due to a higher effective tax rate for the quarter. However, net profit for FY17A is lower by 6.3% yoy as a result of a one-off cost in 3QFY17A coupled with the higher tax rate. The one-off cost arose from the RM150m interest payment to the stabilisation fund, while the effective tax rate is expected to normalise at around 20%, as the reinvestment allowance will be fully utilised by 2019. The current effective tax rate is 16.5% for FY17A.

Maintain BUY and TP of RM16.50

We are maintaining our BUY call on the stock, with an unchanged DCFbased TP of RM16.50, as we believe that under the ICPT mechanism, the increase in fuel costs will be earnings neutral to TNB, supporting the current pay-out. We are not overly perturbed by the 1% yoy demand growth, due to exceptionally high demand in FY16 from the warmer weather. TNB remains our country top pick. A major risk lies in any changes to the current ICPT mechanism.

Source: Affin Hwang Research - 27 Oct 2017