Tenaga Nasional  (TNB)’s  FY13 adjusted net profit of MYR4.4bn  met  our expectations.  However,  the  headline  numbers  were  distorted  by management’s  pre-emptive  approach  to  book  in  one-third  of  the incremental cost  on LNG procurement  as well as forex  gains.  Maintain BUY,  with our FV upgraded to MYR10.65  (from MYR10.13),  based on  a revised FY14 P/E of 14x, in view of the potential sector reforms ahead.

• Demand growth. TNB reported a FY13 revenue of MYR37.1bn, up by a decent 3.6% y-o-y,  fuelled  by higher electricity sales, which  rose  3.8% over the period. Meanwhile, its operating expenses inched up marginally by  0.9%  y-o-y,  as  favourable  fuel  costs  helped  to  mitigate  the  higher general  expenses  and  other provisions.  It is  worth  noting  that  average coal prices  stood at USD83.60  per tonne  in FY13 vis-à-vis USD103.6 in FY12.
• MYR348.9m  LNG  fuel  cost-sharing.  Following  the  commencement  of the liquefied natural gas (LNG) regasification terminal in Sungai Udang, Melaka  on  23  May,  management  has  guided  that  TNB  received  an average gas supply of 1,200-1,300m standard cu ft per day (mmscfd) in 4QFY13.  Given  that  the  Government  has  yet  to  decide  on  the  costsharing  mechanism  in  relation  to  the  additional  200-300mmscfd  LNG supply while Petronas has highlighted that anything above 1,000mmscfd will  be  supplied  at  the  market  rate,  TNB’s  management  took  a  preemptive  approach  to  book  in  one-third  of  the  incremental  costs  on  its LNG procurement, which amounted to MYR348.9m in 4QFY13 alone.
• Within  expectations.  Excluding  this  sum  as  well  as  a  forex  gain  of MYR602.7m,  TNB’s  FY13  adjusted  core  earnings  of  MYR4.4bn  were spot-on  with our full-year forecasts  and trumped consensus estimate by 8.7%.  Management has proposed a final DPS of 15.0 sen, bringing its FY13 DPS to 25.0 sen (vis-à-vis 19.5 sen in FY12). This quantum, which implies a payout ratio of 32.4% from its adjust ed core earnings, is in line with  our  expectations,  as  we  had  highlighted  in  our  earlier  results preview.

Another Stellar Quarter

• Sales driven by higher demand. Higher  electricity  sales.  TNB  reported  a  FY13  revenue  of  MYR37.1bn,  up  by  a decent 3.6% y-o-y, driven by higher electricity sales, which rose 3.8% over the period to  99,921  GWh. Consumption in both the commercial and domestic sectors grew by a sturdy 4.7% and 7.3% y-o-y respectively, while the industrial segment also posted a decent growth of 1.3% y-o-y.
• Weakness in coal prices. Favourable coal prices.  The group’s operating expenses  inched up 0.9% y-o-y as favourable  fuel  costs  helped  mitigate  the  higher  general  expenses  and  other provisions. Note that average coal prices closed at USD83.6 per tonne in FY13 vis-àvis  USD103.6  in  FY12,  with  a  total  procurement  of  20.8  tonnes  in  both  years. Meanwhile, payments to independent power producers (IPPs)  fell  1.5% y-o-y due to lower  capacity  payments  incurred  as  a  result  of  unplanned  outages  at  one  of  the IPP’s  power  plants.  We  understand  that  savings  from  this  amounted  to  around MYR200m  in  FY13,  but  we  do  not  discount  the  possibility  of  a  potential  reversal, pending management’s ongoing discussions with the IPP involved.
• Pre-emptive approach to book in LNG fuel cost-sharing. MYR348.9m  LNG  fuel  cost-sharing.  Following  the  commencement  of  the  LNG regasification terminal in Sungai Udang, Melaka on 23 May, management guided that TNB received an average gas supply of 1,200-1,300mmscfd  in 4QFY13. Given that the Government has yet to decide on the cost-sharing mechanism  of the additional 200-300mmscfd LNG supply  while Petronas,  on the other hand,  has highlighted that anything above 1,000mmscfd will be supplied at the market rate, TNB’s management took a pre-emptive approach to book in  one-third  of the  incremental costs on LNG procurement, amounting to MYR348.9m in 4QFY13 alone.
• Adjusted net profit reached MYR4.4bn. Within  expectations.  Stripping  this  out,  TNB’s  FY13  adjusted  core  earnings  of MYR4.4bn were spot-on with our full-year forecasts and trumped consensus estimate by 8.7%. However, headline net profit came in at MYR4.6bn due to forex gains of MYR602.7m, which were partly offset by the incremental costs on LNG procurement. Meanwhile,  management has  proposed  a final  DPS  of  15.0  sen,  bringing its  FY13 DPS to 25.0  sen  (vis-à-vis 19.5  sen in FY12),  which implies a payout ratio of 32.4% from  its  adjusted  core  earnings.  The  quantum  is  in  line  with  our  expectations,  as highlighted in our 28 Oct results preview previously. 4QFY13 core earnings at  MYR1.1bn.  4QFY13 revenue and core earnings reached MYR9.5bn  and  MYR1.1bn  respectively. The numbers  were generally weaker q-o-q due to seasonality but showed a y-o-y improvement, driven by  higher electricity sales and improved profit margins on favourable fuel expenses.
• Construction of new plants all on schedule. Capacity  expansion  on  track.  Works  at  its  proposed  Janamanjung  and  Prai expansion  as  well  as  its  new  hydro  plants  in  Hulu  Terengganu  and  Ulu  Jerai  are largely  on  track.  Its  recently-bagged  Project  3A  is  on  schedule  to  commence operations  by  Oct  2017.  However,  Management  did  not  comment  on  the  recent media report which suggested that TNB has submitted the highest bid for Project 3B, comprising a 2x1,000MW coal-fired power plant, at 28 sen per kWH.
• Profitability to be driven by stable demand growth as well as favourable coal prices moving forward. Stable  outlook  ahead.  Moving  into  FY14,  management  believes  that  higher domestic  demand  as  well  as  an  improvement  in  local  economic  activities  would continue to spur power consumption. We are forecasting demand growth of 3.7%  for FY14  and  a  relatively  moderated  2.6%  for  FY15,  as  we  adopt  a  precautionary approach  to  factor  in  a  potential  slowdown  in  demand  growth  upon  the implementation of the goods and services tax  by  April  2015.  Besides, management opines that average coal prices would likely hover around the current level of USD75-85 per tonne. Thus, we make no changes to our coal price assumptions of USD90 for FY14 and USD92 for FY15 for now.
• Potential sector reforms to benefit TNB in the long run. FCPT  may  be  implemented.  We  believe  that  a  deregulation  of  the  existing  tariff scheme, ie implementing the fuel cost pass-through (FCPT) formula, is highly likely in the  near  to  medium  term,  as  the  Government  reaffirmed  its  stance  on  subsidy rationalisation  when  announcing  the  Budget  2014.  This  would  help  minimise  the downside risks to TNB’s earnings in the long run should there be  a spike in fuel cost.
• Top Pick in the utility sector. Management,  meanwhile,  remains  hopeful  of  the  rollout  of  incentive-based regulations as well as the setting up of a stabilisation fund over the medium term.  Maintain BUY.  We make no major changes to our core assumptions,  but  trim  our FY14F and FY15F earnings estimates by 0.5% and 0.6% respectively as we finetune our model following the release of the group’s FY13 financials. In view of the potential sector reforms ahead, we maintain our BUY call on TNB,  with our FV revised  higher to  MYR10.65  (from  MYR10.13),  pegged  to  a  higher  FY14  P/E  of  14x  (from  13x), which is the stock’s 5-year historical average

Financial Exhibits

SWOT Analysis

• Potential implementation of a fuel cost passthrough mechanism will help to ensure sustainability of the national utility company’s profits in the long run.

Company Profile
TNB is  Malaysia's national utility company and has a near monopoly in the transmission and distribution of electricity in Peninsular Malaysia and Sabah.

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Source: RHB