COMPANY UPDATE

Monday, December 17, 2018

FBMKLCI: 1,661.96
Sector: Power & Utilities

THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY*

Tenaga Nasional Berhad TP: RM15.50 (+16.9%)

Last Traded: RM13.26
Higher 1H19 Electricity Surcharge BUY
Kylie Chan Sze Zan Tel: +603-2167 9601 kyliechan @ta.com.my www.taonline.com.my

The News Share Information

Bloomberg Code TNB MK

The Energy Commission (EC) announced implementation of the Imbalance Stock Code 5347
Cost Pass Through (ICPT) mechanism for the period of Jan-June 2019 Listing Main Market
(1H19). Share Cap (mn) 5,687
Market Cap (RMmn) 75,408

Due to higher fuel and generation cost for the period of Jul-Dec 2018, the Par Value (RM) 1.00
additional generation cost or imbalance cost amounts to RM1.82bn. 52-wk Hi/Lo (RM) 16.34/13.12
12-mth Avg Daily Vol ('000 shrs) 9,071.8

Mode of payment for the additional costs are as per Figure 1:- Estimated Free Float (%) 36
Beta 0.9
Figure 1: Breakdown of Imbalance Cost Source of Funding Major Shareholders (%) Khazanah - 28.8
EPF - 12.6
Amount
Sen/kwH PNB - 9.0
(RM mn) Forecast Revision (%)
Domes tic FY18 FY19
F ully funded by KWIE (Kumpula n Wa ng Industri E lektrik) 308 Forecast Revision (%) -1 -1
Core Net Profit (RM mn) 6,616.1 6,466.0
Non-Domes tic
Consensus 7,180.0 6,494.0
2018 cost a nd revenue a djustment for TNB (F ig ure 2) 564 TA/Consensus (%) 92.1 99.6
S ta g g ered ICP T surcha rg e 948 2.15 Previous Rating Buy (Maintained)
TOTAL 1,820 3.43
Financial Indicators
FY18 FY19

Breakdown of Tenaga Nasional Berhad’s (TNB) adjustments are as per Net Debt/Equity (x) 0.6 0.6
ROA (%) 4.5 4.1
Figure 2.
ROE (%) 10.7 9.9
Figure 2: Breakdown of TNB’s 2018 Cost & Revenue Adjustments BV/Share (RM) 10.9 11.4
P/BV (x) 1.2 1.1
RM mn Description/ Notes
Share Performance
E xcess Revenue Price Change (%) TNB FBMKLCI
- Revenue Cap 141 F igure 3 1 mth (11.0) (2.6)
- P rice Cap 226 F igure 4 3 mth (16.1) (7.9)
6 mth (8.6) (5.7)
Refund of Interests on Customer Deposits 59 12 mth (14.1) (5.2)
Refund of E xcess S ingle Buyer (S B) Working Cap 57 Refund of return on S B working cap.
(12-Mth) Share Price relative to the FBMKLCI
Refund of Other Income related to Regulated Biz 81 Non-electricity income from use of
RP 2 allowed capex & opex.
Total 564.4

Source: Bloomberg

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Figure 3: 2018 Variations in Sales for Revenue Cap Figure 4: 2018 Variations in Sales for Customer
Entities Service (CS) under Price Cap model

Source: Company Source: Company

Note:- Actual/ Estimated sales includes 9 months actual sales (Jan-Sep 2018) and 3 months estimated sales (Oct-Dec 2018)

Implementation of staggered ICPT surcharge (Figure 5) for non-domestic

customers is once-off to allow ample notice for transition.
Figure 5: Staggered ICPT Surcharge for non-Domestic Customers

Surcharge
Period
(s en/kWh)
J a n-19 to F eb-19 1.35*
Ma r-19 to J un-19 2.55
* U nc hang e d fro m 2H18 s urc harg e

The imbalance cost was mainly underpinned by the increase in coal price
(Figure 6) to USD97.835/mt versus forecast coal price of USD75/mt imputed
in the base tariff (39.45 sen/kwH) for Regulatory Period 2 (RP2).
Additionally, this was exacerbated by higher share of coal generation in
2H18 (55% coal, 39% gas).

Figure 6: Applicable Coal Prices (ACP) in 2H18

Source: Company

Recap

Since RP2’s (2018-20) implementation to-date, EC has announced ICPT under
recoveries (Figure 7) that were funded via KWIE, customer surcharge, TNB’s excess
revenues, etc.

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 17-Dec-18

Figure 7: ICPT Funding by Segment

Period Mode of Funding for ICPT

1H18 All segments: RM698mn (1.35 sen/kwH) fully funded by KWIE

2H18 Domestic: Fully funded by KWIE

Non-domestic: 1.35 sen/kwH surcharge
1H19 Domestic: Fully funded by KWIE
Non-domestic:
FY18 Cost & Revenue Adjustment for TNB (RM564mn)
1.35 sen/kwH surcharge (Jan-Feb 2019)
2.55 sen/kwH surcharge (Mar-Jun 2019)

Under the Incentive Based Regulation (IBR) framework, TNB’s regulated entities are
required to return collection of excess revenue, which is either based on revenue or
price cap.

Entities that operate under the revenue-cap model include: 1) Transmission, 2)
Distribution network, 3) Single-Buyer operations, and 4) Grid System Operator.
Whereas Customer Services is the sole entity under Price-cap.

Examples for other income related to regulated business include: 1) rental income
from office space for buildings that comprise part of RAB, 2) revenue from RAB asset
disposal etc.

Any shortage or surplus in ICPT surcharges during the preceding 6-month period will
only be passed-through to consumers in the upcoming 6-month period. If audited
actual sales during the upcoming 6-months are higher or lower than expected, hence
adjustments for the over-recovery/surplus will be reflected in the 6-month period
thereafter.

Our Take

We are neutral on this announcement as ICPT implementation does not affect TNB’s
earnings, albeit with some impact to cash flows as mentioned above.

However, we are pleasantly surprised that revenue and cost adjustments for TNB are
on annual basis (versus end of RP2 period). Hence, this would result in smoother
annual earnings with more timely reflection of actual results (net of ICPT adjustments).

To recap, back in Jan-18, management guided that excess RP2 revenues would be
channelled towards KWIE. Therefore, we view the current practice of annual
adjustment as more efficient. Additionally, we are encouraged by TNB’s transparency
in providing granularity on ICPT. A fully functioning and efficient IBR regime ensures
stable and robust earnings for TNB.
Impact

We tweak our forecasts to reflect the higher-than-expected revenue and cost
adjustment for TNB. This includes lowering our assumptions on interest and other
income. Additionally, we also raise our coal price assumption higher. As a result, our
FY18-20 forecasts are lowered by 1%.
Valuation

Following the earnings downgrade, our target price on TNB is reduced to RM15.50
(previous: RM16.62) based on DCF (WACC: 7.3%, terminal growth: 1.5%).

There may be a round of earnings downgrades from consensus following TNB’s earlier-
than-expected revenue and cost adjustment. Nevertheless, we believe that long term
earnings remain intact, underpinned by efficient and robust ICPT implementation.

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 17-Dec-18

Maintain Buy on TNB, underpinned by 1) aggressive international expansion, 2) strong

balance sheet, 3) newsflow traction from monetization of fibre assets, and 4) attractive
valuations.

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 17-Dec-18

Earnings Summary
Income Statement Balance Sheet
FYE Dec* (RM mn) 2017 2017** 2018E 2019F 2020F FYE Dec* (RM mn) 2017 2017** 2018E 2019F 2020F
Revenue 47,416.9 15,827.1 49,559.9 50,913.1 52,037.4 P roperty, P la nt & E quip 103,083.7 104,807.6 108,977.7 114,799.5 120,449.4
E B ITDA 15,619.0 5,206.2 15,207.5 16,178.7 16,553.6 P repa id Op Lea s es 5,353.7 5,505.2 5,353.7 5,353.7 5,353.7
Depr & a mort (6,105.0) (2,049.9) (6,372.7) (6,457.1) (6,641.3) As s ocia tes & J Vs 3,090.1 2,952.3 3,108.2 3,185.2 3,266.0
Net Int E xp (1,218.4) (442.5) (1,194.5) (1,519.6) (1,518.7) Others 2,964.2 3,275.0 2,964.2 2,964.2 2,964.2
As s ocia tes 128.3 (44.7) 18.1 77.0 80.8 Non-Current As s ets 114,491.7 116,540.1 120,403.8 126,302.6 132,033.3
E xceptiona ls (142.1) 310.2 (654.7) 0.0 0.0
P reta x profit 8,281.8 2,979.3 7,003.7 8,278.9 8,474.4 Inventories 828.7 885.0 1,086.2 970.5 1,014.0
Ta xa tion (1,369.7) (235.4) (1,050.6) (1,821.4) (1,864.4) Tra de receiva bles 8,962.2 10,362.1 10,183.5 10,461.6 10,692.6
Minority interes t 8.1 11.8 8.3 8.5 8.7 Ca s h a nd Depos its 5,056.2 5,415.0 3,628.5 5,929.1 6,988.0
Net P rofit 6,920.2 2,755.7 5,961.4 6,466.0 6,618.7 Others 12,673.6 11,075.0 12,673.6 12,673.6 12,673.6
Core Net Profit 7,062.3 2,445.5 6,616.1 6,466.0 6,618.7 Current As s ets 27,520.7 27,737.1 27,571.9 30,034.8 31,368.2

Per Share Data Total As s ets 142,012.4 144,277.2 147,975.6 156,337.4 163,401.6
Core E P S (s en) 124.4 43.1 116.5 113.9 116.6
DP S (s en) 61 21 58 57 58 B orrowing s 38,016.2 40,662.5 39,805.0 43,649.6 46,045.7
B ook Va lue (RM) 10.1 10.1 10.9 11.5 12.1 E mployee benefits 10,887.3 11,036.3 10,887.3 10,887.3 10,887.3
F CF (s en) 5.4 nm (3.7) 58.7 61.0 Deferred ta xa tion 7,728.3 7,646.0 8,043.5 8,589.9 9,149.2
Deferred income 993.9 1,107.6 993.9 993.9 993.9
Ratios Others 11,475.4 11,440.7 11,475.4 11,475.4 11,475.4
FYE Dec* (RM mn) 2017 2017** 2018E 2019F 2020F Non-Current Liabilities 69,101.1 71,893.1 71,205.0 75,596.1 78,551.5
Valuations
Core P E R (x) 10.7 nm 11.4 11.6 11.4 Tra de pa ya bles 10,245.0 9,065.2 9,233.1 9,764.2 10,692.6
Dividend Yield (% ) 4.6 nm 4.4 4.3 4.4 Other pa ya bles 329.6 336.4 407.3 697.4 500.8
E V/E B ITDA (x) 7.0 nm 7.4 7.1 7.0 Deferred income 1,460.9 1,487.2 1,460.9 1,460.9 1,460.9
P /B V (x) 1.3 1.3 1.2 1.1 1.1 B orrowing s 1,808.1 1,745.3 1,808.1 1,808.1 1,808.1
F CF F Yield (% ) 0.4 nm (0.3) 4.4 4.6 Others 1,482.9 1,620.2 1,482.9 1,482.9 1,482.9
Current Liabilities 15,326.5 14,254.3 14,392.3 15,213.5 15,945.3
Profitability Ratios
E B ITDA ma rg in (% ) 32.9 32.9 30.7 31.8 31.8 S ha re ca pita l 11,124.9 11,199.6 11,124.9 11,124.9 11,124.9
E B IT ma rg in (% ) 20.1 19.9 17.8 19.1 19.0 Res erves 45,986.5 46,005.0 50,788.3 53,946.2 57,331.9
P reta x ma rg in (% ) 17.5 18.8 14.1 16.3 16.3 Minority interes t 473.4 925.2 465.1 456.6 448.0
Net ma rg in (% ) 14.6 17.4 12.0 12.7 12.7 Equity 57,584.8 58,129.8 62,378.3 65,527.8 68,904.8
Core net ma rg in (% ) 14.9 15.5 13.3 12.7 12.7
ROE ^ (% ) 12.4 12.3 10.7 9.9 9.7 Total Equity + Liabilities 142,012.4 144,277.2 147,975.6 156,337.4 163,401.6
ROA^ (% ) 5.0 1.7 4.5 4.1 4.1
Cas hflow Statement
Liquidity ratios FYE Dec* (RM mn) 2017 2017** 2018E 2019F 2020F
Current ra tio (x) 1.8 1.9 1.9 2.0 2.0 P AT 6,912.1 2,743.9 5,953.1 6,457.6 6,610.0
Quick ra tio (x) 1.7 1.9 1.8 1.9 1.9 Add: Net Ta xes 729.9 (15.2) 315.2 546.4 559.3
Deprecia tion 6,105.0 2,049.9 6,372.7 6,457.1 6,641.3
Leverage ratios Net Interes t 1,218.4 442.5 1,194.5 1,519.6 1,518.7
Gros s Gea ring (x) 0.7 0.7 0.7 0.7 0.7 As s ocia tes & J CE s (128.3) 44.7 (18.1) (77.0) (80.8)
Net g ea ring (x) 0.6 0.6 0.6 0.6 0.6 Net chg in working ca p (2,217.9) (2,629.2) (2,413.1) 658.9 457.3
Tota l Debt/ As s ets (x) 0.3 0.3 0.3 0.3 0.3 Others (63.2) (651.4) 654.7 0.0 0.0
Interes t Covera g e (x) 12.8 11.8 12.7 10.6 10.9 CF from Operations 12,556.0 1,985.2 12,059.1 15,562.6 15,705.8

Growth ratios ^ Ca pex (12,519.7) (3,768.6) (12,266.7) (12,278.9) (12,291.2)

Revenue (% ) 6.5 nm 4.5 2.7 2.2 Interes t income 237.6 133.5 404.5 181.4 296.5
E B ITDA (% ) 5.6 nm (2.6) 6.4 2.3 Others (400.5) 1,748.7 0.0 0.0 0.0
P BT (% ) 2.7 2.6 (15.4) 18.2 2.4 CF from Inves ting (12,682.6) (1,886.4) (11,862.2) (12,097.5) (11,994.8)
Core Net P rofit (% ) (7.5) 1.3 (6.3) (2.3) 2.4
Core E P S (% ) (7.7) 1.2 (6.3) (2.3) 2.4 Dividends (2,205.5) (2,493.0) (1,814.3) (3,308.1) (3,233.0)
Net Cha ng e in debt 4,510.8 3,161.0 1,788.8 3,844.6 2,396.1
Interes t pa id (1,084.4) (585.2) (1,599.0) (1,701.1) (1,815.2)
Others 5.8 183.3 0.0 0.0 0.0
CF from Financing 1,226.7 266.1 (1,624.6) (1,164.5) (2,652.1)

Net Ca s h F low 1,100.1 364.9 (1,427.7) 2,300.6 1,059.0

* 2016-17*: F Y E A ug FX 0.0 (2.4) 0.0 0.0 0.0
** 4 m o nths F Y E D e c B eg inning Ca s h 3,956.1 5,056.2 5,056.2 3,628.5 5,929.1
^ A djus te d 12 m o nths fo r F Y 17** Ending Cas h 5,056.2 5,418.7 3,628.5 5,929.1 6,988.0

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(TH I S P A GE IS IN TE N TI ON AL L Y L E F T B L AN K )

Stock Recommendation Guideline

BUY : Total return within the next 12 months exceeds required rate of return by 5%-point.
HOLD : Total return within the next 12 months exceeds required rate of return by between 0-5%-point.
SELL : Total return is lower than the required rate of return.
Not Rated: The company is not under coverage. The report is for information only.
Total Return is defined as expected share price appreciation plus gross dividend over the next 12 months. Gross dividend is excluded from total return
if dividend discount model valuation is used to avoid double counting.
Required Rate of Return of 7% is defined as the yield for one-year Malaysian government treasury plus assumed equity risk premium.

Disclaimer
The information in this report has been obtained from sources believed to be reliable. Its accuracy and/ or completeness is not guaranteed and opinions are subject to change without
notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document.
We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein.

As of Monday, December 17, 2018, the analyst, Kylie Chan Sze Zan , who prepared this report, has interest in the following securities covered in this report:
(a) nil

Kaladher Govindan – Head of Research

TA SECURITIES HOLDINGS BERHAD (14948-M)

A Participating Organisation of Bursa Malaysia Securities Berhad
Menara TA One 22 Jalan P. Ramlee 50250 Kuala Lumpur Malaysia Tel: 603 – 2072 1277 Fax: 603 – 2032 5048
www.ta.com.my

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