Tenaga Nasional : Good start to the
year
BUY (Amended Copy)
TNB’s 1QFY17 core net profit of
RM1,966mil, excluding
forex losses, are in line with both ours and consensus earnings
estimates, both at 26%. 1QFY17 revenue rose by 5.3% YoY to RM11,242mil, driven
by a 3.6% rise in electricity demand and a flattish -0.1% change in tariff
rates to 39.4sen/Kwh. Total cost rose by 5.0% to RM3,969mil due to higher fuel
spend as coal average USD63/mt vs. USD59/mt a year ago (6.8% YoY). However,
cost was buffeted by i) favourable industry generation output mix of 42:54:4
for gas, coal and others, compared to 47:49:4 in 1QFY16 and ii) cheaper LNG
inputs. A one-off RM200mil provision ballooned general expenses as well. As a result,
EBITDA rose 1.5% to RM3,794mil as EBITDA margins contracted to 33.7%.
Management expects higher but stabilised coal prices in the
region of USD78/mt (v USD63/mt in 1QFY17). A mitigating factor includes
management’s outlook on LNG prices at RM28.00/mmbtu, which is below the base
tariff rate of RM41.68/mmbtu. However, regardless of external prices, the
cumulative Imbalance Cost Pass Through (ICPT) surplus coupled with cost savings
derived from the renegotiation of cheaper 1st generation PPAs of RM1.4bil
allows for sufficient cover of the current under recovery rate. It suffices for
the remainder of FY17, by our estimates. We like TNB for its improved earnings
visibility and exciting M&A outlook, which is expected to supplement
earnings and optimize its capital structure. Maintain BUY with a DCF-based TP
of MYR19.36 (WACC:7.7 TG:2.0). It implies 14.0x CY17F, below its 3-year
historical +1SD band of 15.0x. Implied dividend yields for FY17-FY19 remain
decent at 3.4%-3.7%.
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