AmWatch - Tenaga Nasional : Full-year impact from ICPT BUY, 30 Oct 2015

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Tenaga Nasional : Full-year impact from ICPT      BUY

We maintain BUY on Tenaga Nasional Bhd (TNB) with a lower DCF-derived fair value of RM14.80/share (vs. RM16.70/share previously) as we shift our base year to FY16F. TNB posted 4QFY15 core net profit of RM1.5bil on the back of RM11.7bil in revenue. This brings its full-year core net earnings to RM6.9bil, which met both our and market expectations. Our numbers exclude cumulative forex translation losses of RM819.35mil.

TNB’s revenue for the full year grew 1.2% on the back of an 8% growth in electricity sales. The higher sales can be attributed to higher average electricity tariff of 15% and 17% in Peninsular Malaysia and Sabah, respectively, effective Jan 2014. The topline also includes cost over-recovery of RM1.9bil under the Imbalance Cost Pass Through (ICPT) mechanism. TNB’s EBITDA margins had improved to 32% (vs. 28% in FY14). TNB is proposing a final single-tier dividend of 19sen, which will bring the total payout to 29sen for FY15 (yield: 2.4%). On the cost side, TNB saw a 9.6% reduction in fuel costs due to lower consumption of gas, LNG, distillate and oil. While coal consumption had increased to 22.2mil MT (vs. 19.3mil MT), coal price had averaged lower at USD66/MT (-13% from USD75/MT). Overall, gas & LNG still formed a large part of the generation mix (49.4%), followed by coal (46%). Looking into FY16F, coal consumption is expected to increase to 28mil following the commissioning of Malakoff’s Tanjung Bin 4 (1,000MW) in March 2016.

We tweaked our numbers to reflect a slower growth in electricity demand (FY15’s 2.2% vs. FY14’s 2.5%) over the few years. We expect TNB to continue to see cost over-recovery as fuel costs remain below the benchmark rates under the ICPT mechanism. While TNB’s existing operating prospects remain sound, concerns remain over its possible acquisition of Edra Global’s assets. Recall that 1MDB is estimated to have paid RM12bil to acquire the assets and inherited debts of RM6bil. According to reports, 1MDB is expected to announce the winning bid (out of three) by year-end. Management affirmed that due diligence would need to be conducted before any possible deal is signed. Maintain BUY.

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