May not see significant improvement in 4Q. While we believe TNB may continue to face a gas shortage in 4QFY12 as the regasification plant in Melaka will only commence operation in September 2012, it may still have to use more coal and oil & distillates, which cost more than gas. Although management has guided that coal price is now trending down, we still think that it may not significantly bring down generation cost. Thus we do not foresee any significant improvement for TNB in its final quarter of FY12. As such, we are trimming our FY12 earnings forecast by 17% to RM2072m while maintaining our FY13 numbers.

FY13 looks brighter. We believe TNB's FY13 outlook should improve as the regasification terminal in Melaka will commence operation in September while the renegotiation of the 1^st Gen IPPs as well as declining coal price may potentially mitigate the higher generation cost. Also, TNB has been assured that it will not have to bear the brunt of higher gas prices when it starts importing liquefied natural gas (LNG) in September, which seems to indicate that even if gas prices changed, the impact on TNB would be neutral. That said, we prefer not to revise our FY13 earnings numbers at this juncture.

Reiterate BUY, but with a lower FV. TNB still justifies our BUY recommendation in view of the positive developments, which will help it mitigate rising operating costs and boost its bottomline. Also, a tariff revision is likely to be in place post General Election which may lead to a re-rating of TNB. Upon revising our FY12 earnings estimate, the stock's fair value goes down slightly to RM7.57 (from RM7.68), based on our DCF model, with WACC of 9.5% and a terminal growth rate of 3.6%.

Source: OSK