The reduced power tariffs for four months  will  erode TNB’s topline and PBT by MYR815m each,  based on our estimates. We maintain BUY, but cut  our FY15  (Aug)  net profit forecast  by 10%  and our TP to  MYR16.70 from MYR18.60  (16% upside).  While the latest development is negative to TNB, we believe the MYR2.6bn loss in TNB’s market value yesterday would have substantially reflected the bad news.

Tariffs  cut  by  3.5%  to  5.8%  for  four  months.  The  Government  has announced power tariff cuts for four months from 1 Mar to 30 Jun  2015. In Peninsular Malaysia, the tariff will go down by 5.8% or 2.25sen/kWh to 36.28sen/kWh.  On  the  other  hand,  the  tariff  in  Sabah/Labuan  will  be reduced by 3.5% or 1.20sen/kWh to 33.32sen/kWh.  
  An  MYR815m hit to topline and PBT.  We estimate that the reduction will translate in to a revenue loss, and hence PBT loss (as it goes straight down to the bottomline) of about MYR815m to TNB. This will effectively wipe  out  TNB’s  “over-recovery”  of  fuel  costs  estimated  at  about MYR800m  in  FY15,  which  the  market  considered  as  part  of  TNB’s profits.

Forecasts.  We cut our FY15 net profit forecast by 10% to factor in the forgone MYR815m revenue and PBT.

Risks. These include: i) volatility in gas and coal prices, ii) volatility in the MYR’s strength against the USD, and iii) regulatory risks.

Maintain BUY. The latest development means that TNB is no longer a beneficiary of lower fuel costs. On the other hand, it is unclear if there is political will to raise power tariffs if fuel  costs go up. This means it is still premature to jump to the conclusion that TNB has been entirely spared the fuel cost risk. However,  we believe the 3.1% or 46  sen fall in TNB’s share  price  yesterday  -  that  effectively  erased  MYR2.6bn  from  TNB’s market value -  would  have substantially reflected the bad news.  We cut our TP by 10% to MYR16.70 (from MYR18.60) based on 15.4x revised FY15F EPS, at an unchanged 10% premium over TNB’s 5-year historical average  of  14x,  to reflect  better  earnings  visibility  backed  by  improved fuel  availability  (particularly  gas  with  the  commissioning  and  sustained high  performance  from  the  liquefied  natural  gas  (LNG)  regasification terminal in Sg Udang, Melaka).

Reduced Tariffs For Four Months
Tariffs  cut  by  3.5%  to  5.8%  for  four  months.  The  Government  has  announced power tariff cuts for four months from 1 Mar to 30 June 2015, in line with the lower fuel costs. In Peninsular  Malaysia, the tariff will go down by 5.8% or 2.25sen/kWh to 36.28sen/kWh.  On  the  other  hand,  the  tariff  in  Sabah/Labuan  will  be  reduced  by 3.5%  or  1.20sen/kWh  to  33.32sen/kWh.  The  reduction  will  benefit  all  users,  ie. domestic,  commercial  and  industrial,  other  than  domestic  users  with  electricity consumption of 300kWh/month or less.

An  MYR815m hit to topline and PBT. We estimate that the reduction will translate into a revenue loss, and hence PBT loss (as it goes straight down to the bottomline) of  about  MYR815m  to  TNB.  Our  estimates  are  based  on  our  electricity  demandprojections  of  about  35,400  GWh  in  Peninsula  Malaysia  and  1,600  GWh  in Sabah/Labuan during the 4-month period from 1 Mar to 30 June 2015.

Tenaga “gives up” “over-recovery” of fuel costs. This revenue loss will effectively wipe  out  TNB’s  “over-recovery”  of  fuel  costs  (which  come  from  lower  coal  prices, partially offset by higher gas prices) estimated at about MYR800m in FY15 (an actual MYR200m  “over-recovery”  of  fuel  costs  in  1QFY15,  annualised).  To  recap,  in accordance with the Fuel Cost Pass-Through (FCPT) mechanism as stipulated in the new energy policy effective 1 Jan 2014, TNB  was  not supposed to “keep” the “overrecovery” of fuel costs. However, as in the case of MYR600m “under-recovery” of fuel costs in FY14,  the MYR200m “over-recovery” of fuel costs  in 1QFY15  was taken to TNB’s  P&L  in  its  recently  announced  results.  This  was  because  the  half -yearly adjustments in electricity tariffs in accordance to the FCPT did not happen on 1 Jul 2014 and 1 Jan 2015 as scheduled. As such, it was natural for the market to consider the  “over-recovery”  of  fuel  costs  as  part  of  TNB’s  profits  –  which  was  in  a  way,  a “windfall” to TNB on the back of lower fuel costs.

Forecasts.  We cut our FY15 net profit forecast by 10% to factor in the MYR815m revenue and PBT losses, but maintain our FY16 and FY17 earnings forecasts.Risks.  These  include:  i)  volatility  in  gas  and  coal  prices,  ii)  volatility  in  the  MYR’s strength against the USD and iii) regulatory risks.

Tenaga no longer a clear winner of low fuel costs. The latest development meansthat  TNB  is  no  longer  a  beneficiary  of  lower  fuel  costs.  On  the  other  hand,  it  is unclear if there is political will to raise power tariffs if fuel costs go up. This means it is still premature to  jump to the conclusion  that TNB has been  entirely  spared the fuel cost risk.

While the latest development is negative to TNB, we believe the 3.1% or 46  sen fall in  TNB’s  share  price  yesterday  -  that  effectively  erased  MYR2.6bn  from  TNB’s market value -  would  have substantially reflected the bad news. Meanwhile,  TNB is regaining  lost  ground  in  the  more  lucrative  power  generation  business  vis-à-vistransmission and distribution, having emerged as the biggest winner of new power plant projects in Malaysia in recent years (see Figure  1).  We cut  our TP by  10% to MYR16.70 (from MYR18.60) based on a 15.4x revised FY15F EPS, at an unchanged 10% premium over TNB’s 5-year historical average of 14x,  to  reflect  better  earnings visibility backed  by  improved fuel availability (particularly gas with the commissioning and sustained high performance from  the  LNG  regasification terminal in Sg Udang, Melaka).

Source: RHB