Given  the  depreciation  of  MYR  vs  USD,  we  are  revisiting  our  core assumptions to determine the impact on our earnings forecasts. All in, we  are  trimming  our  FY14  and  FY15  net  profit  forecasts  by  3.1%  and 6.4%  respectively,  as  we  expect  TNB  to  incur  higher  coal  costs  due  to the weaker MYR. Maintain BUY, with our FV tweaked lower to MYR10.13 (from MYR10.43).   
 
- Toning  down  earnings.  The  MYR  has  depreciated  by  some  10% against  the  USD  over  the  last  four  months,  from  MYR2.95  per  USD  in early  May  to  MYR3.22  currently.  In  view  of  this,  we  now  peg  our  USD assumptions  at  MYR3.20  for  FY14  (from  MYR3.10)  and  MYR3.25  for FY15  (from  MYR3.00).  Accordingly,  we  trim  our  FY14  and  FY15  net profit forecasts by 3.1% and 6.4% respectively as we expect TNB’s coal procurement costs to rise due to the weaker MYR.   

- Potential translation losses. As at May 2013, TNB had MYR22.9bn in borrowings,  of  which  MYR3.8bn  were  denominated  in  JPY  while MYR2.7bn were in USD. We estimate that a 10 sen depreciation in MYR vs  the  USD  and  JPY  would give  rise  to  translation  losses  of  MYR100m and  MYR140m  respectively, which  we  exclude  from  our  computation  of TNB’s core earnings since these are non-operating in nature.

- 4QFY13  preview.  In  its  upcoming  4QFY13  results  due  for  release  in mid-October,  we  expect  core  earnings  to  come  in  at  MYR1.0bn-1.1bn, since  4Q  is  seasonally  TNB’s strongest  quarter.  We  also  believe  the company will declare a second interim DPS of 15.0 sen, same as that in 4QFY12.  We  also  expect  more  news  on  TNB’s  ongoing  dispute  with Malakoff  with  regard  to  the  MYR200m  in  capacity  payment  the  latter  is seeking for its Tanjung Bin plant.  

- Maintain  BUY.  Following  our  earnings  revision,  our  FV  is  now  revised lower  to  MYR10.13,  based  on  an  unchanged  13x  FY14  P/E.  All  in,  we maintain our BUY call on TNB, which is our Top Pick for the utility sector. The counter’s key re-rating catalysts include continued weakness in coal prices, sturdy domestic economic growth to spur electricity consumption, as  well  as  the  potential  implementation  of  the  fuel  cost  pass-through formula.

Source: RHB