Analysts still positive on outlook for TNB

PETALING JAYA: Analysts remain positive on Tenaga Nasional Bhd (TNB) due to its strong fundamentals and stable cash flow, despite the company suffering a 15% drop in net profit in its third quarter ended May 31, 2017.

Affin Hwang Capital said TNB’s 9M FY17 results were largely in line with its expectations, despite an 8% year-on-year drop in net profit to RM5.2 billion.

“While revenue continue to track our forecast, the miss was mainly due to higher finance cost and effective tax rate, which management has indicated are one-offs for the quarter. As such, we are maintaining our “buy” call on the stock with an unchanged target price of RM16.50,” it said in a report last Friday.

The research house said the increase in fuel costs will be earnings neutral to TNB under the Imbalance Cost Pass-Through (ICPT) mechanism, hence the company’s strong fundamentals remain unchanged. The stock remains one of the country’s top picks.

“Management has reiterated that under the ICPT mechanism, the increase in generation cost will be passed through and it will remain earnings neutral to TNB. As such, we believe that regardless of the government’s decision on the tariff adjustment in December, it should remain earnings neutral to TNB (apart from changes on the regulated return),” it added.

Note that post-rebates in 2H17, the stabilisation fund will have a balance of RM500 million by year-end. TNB incurred a one-off financing cost of RM150 million during the quarter due to interest payment to the stabilisation fund, which is recognised in TNB’s balance sheet.

“While total cost has yet to be finalised, management has indicated that any additional cost will not be significant as the bulk of the cost has been recognised in this quarter. Moving forward, the fund will be handled by the Energy Commission and hence TNB will not incur further costs related to managing the stabilisation fund,” it said.

While net profit for the third quarter was dragged down by the higher effective tax of 20% or RM430 million, TNB has guided that the effective tax rate will normalise in the next quarter, as they can still utilise the reinvestment allowances until 2019.

Meanwhile, Hong Leong Investment Bank (HLIB) Research has maintained its “buy” call with an unchanged price target of RM17.

During the quarter, TNB incurred cost under-recovery of RM507.1 million due to higher fuel costs from piped gas price, higher average coal prices and weak ringgit.

However, HLIB Research said under the Incentive Based Regulation and ICPT mechanism, TNB would be able to recoup the RM507.1 million.

“The government has announced that TNB would be compensated of RM1.3 billion in 2H17 through PPA savings. PPA savings fund amounted to RM1.8 billion as at end Q3’17,” it noted.

With demand for electricity having normalised in Q2’17 after the El Nino effect, TNB expects electricity demand growth to be in line with gross domestic product growth of 4.3-4.8% in 2017.

As for the taxation issue with the Inland Revenue Board, TNB is confident on its case against IRB and has continued to recognise investment tax allowance.

TNB shares dropped 8 sen to close at RM14.16 last Friday on some 9.19 million shares done, giving it a market capitalisation of RM80.13 billion.