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Tenaga Nasional - More than just a tariff hike

7% average tariff hike sooner-than-expected.

TNB has finally received approval for the tariff hike effective 1 June 2011. The 7.2% hike beat our 2-3% expectation, and came sooner-than-expected - the market had expected it to come through after the general election. Industrial and commercial users will be slapped with an average 8.3% hike in tariff, while 75% of households will not be affected.

Tariff hike more than offset gas price increase.
Cost of subsidised gas to the power sector will increase by 28% to RM13.70/mmbtu, but TNB will still see a positive RM600m p.a. net impact after the tariff hike. The higher gas cost will
be offset by a 5.1% tariff increase, and base tariff will be raised by another 2% to account for higher CPI and generation cost. More importantly, TNB has received cabinet approval for the fuel cost pass-through mechanism. The mechanism allows for a tariff review every six months that will enable TNB to pass-through increases in gas (upfront) and coal (with 6 month lag) costs. We raised FY11-13F net profit by 6%, 22% and 18%, respectively, after factoring in the change in tariff rates.

Fuel cost pass-through is a key re-rating catalyst.
TNB is not just a one-off tariff hike story. We expect strong re-rating of the stock as the tariff hike has again proven that TNB will receive relief from rising fuel prices. The key re-rating
catalyst will come from greater clarity and certainty in terms of the timing and mechanism of future tariff adjustments. Maintain Buy, but with a higher target price of RM8.80 pegged to 14x CY12 PE. TNB is also a market laggard and under-owned big-cap in Malaysia with good leverage to stronger GDP growth and Ringgit.

Report from HWangDBS


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