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

C O M P A N Y U P D A T E 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%) Higher 1H19 Electricity Surcharge Last Traded: RM13.26 BUY Kylie Chan Sze Zan Tel: +603-2167 9601 kyliechan @ta.com.my www.taonline.com.my The News The Energy Commission (EC) announced implementation of the Imbalance Cost Pass Through (ICPT) mechanism for the period of Jan-June 2019 (1H19). Due to higher fuel and generation cost for the period of Jul-Dec 2018, the additional generation cost or imbalance cost amounts to RM1.82bn. Mode of payment for the additional costs are as per Figure 1:- Figure 1: Breakdown of Imbalance Cost Source of Funding Domes tic Amount (RM mn) Sen/kwH F ully funded by KWIE (Kumpula n Wa ng Industri E lektrik) 308 Non-Domes tic 2018 cost a nd revenue adjustment for TNB (F igure 2) 564 S tagg ered ICP T surcharg e 948 2.15 TOTAL 1,820 3.43 Breakdown of Tenaga Nasional Berhad s (TNB) adjustments are as per Figure 2. Figure 2: Breakdown of TNB s 2018 Cost & Revenue Adjustments RM mn Description/ Notes E xcess Revenue - Revenue Cap 141 F igure 3 - P rice Cap 226 F igure 4 Refund of Interests on Customer Deposits 59 Refund of E xcess S ingle Buyer (S B) Working Ca p 57 Refund of return on S B working cap. Refund of Other Income related to Regulated Biz 81 Non-electricity income from use of RP 2 allowed capex & opex. Total 564.4 Share Information Bloomberg Code TNB MK Stock Code 5347 Listing Main Market Share Cap (mn) 5,687 Market Cap (RMmn) 75,408 Par Value (RM) 1.00 52-wk Hi/Lo (RM) 16.34/13.12 12-mth Avg Daily Vol ('000 shrs) 9,071.8 Estimated Free Float (%) 36 Beta 0.9 Major Shareholders (%) Khazanah - 28.8 EPF - 12.6 Forecast Revision (%) FY18 PNB - 9.0 FY19 Forecast Revision (%) -1-1 Core Net Profit (RM mn 6,616.1 6,466.0 Consensus 7,180.0 6,494.0 TA/Consensus (%) 92.1 99.6 Previous Rating Financial Indicators FY18 FY19 Net Debt/Equity (x) 0.6 0.6 ROA (%) 4.5 4.1 ROE (%) 10.7 9.9 BV/Share (RM) 10.9 11.4 P/BV (x) 1.2 1.1 Share Performance Buy (Maintained) Price Change (%) TNB FBMKLCI 1 mth (11.0) (2.6) 3 mth (16.1) (7.9) 6 mth (8.6) (5.7) 12 mth (14.1) (5.2) (12-Mth) Share Price relative to the FBMKLCI Source: Bloomberg Page 1 of 6

Figure 3: 2018 Variations in Sales for Revenue Cap Entities Figure 4: 2018 Variations in Sales for Customer 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 Period Surcharge (s en/kwh) J an-19 to F eb-19 1.35* Mar-19 to J un-19 2.55 * Unchanged from 2H18 s urcharge 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. Page 2 of 6

Figure 7: ICPT Funding by Segment Period 1H18 2H18 1H19 Mode of Funding for ICPT All segments: RM698mn (1.35 sen/kwh) fully funded by KWIE Domestic: Fully funded by KWIE Non-domestic: 1.35 sen/kwh surcharge 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). Impact 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. Valuation 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%. 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 earlierthan-expected revenue and cost adjustment. Nevertheless, we believe that long term earnings remain intact, underpinned by efficient and robust ICPT implementation. Page 3 of 6

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. Page 4 of 6

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 lant & E quip 103,083.7 104,807.6 108,977.7 114,799.5 120,449.4 E BITDA 15,619.0 5,206.2 15,207.5 16,178.7 16,553.6 P repaid Op Leases 5,353.7 5,505.2 5,353.7 5,353.7 5,353.7 Depr & amort (6,105.0) (2,049.9) (6,372.7) (6,457.1) (6,641.3) Associates & 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 Associates 128.3 (44.7) 18.1 77.0 80.8 Non-Current Assets 114,491.7 116,540.1 120,403.8 126,302.6 132,033.3 E xceptionals (142.1) 310.2 (654.7) 0.0 0.0 P retax 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 Taxation (1,369.7) (235.4) (1,050.6) (1,821.4) (1,864.4) Trade receivables 8,962.2 10,362.1 10,183.5 10,461.6 10,692.6 Minority interest 8.1 11.8 8.3 8.5 8.7 Cash and Deposits 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 Assets 27,520.7 27,737.1 27,571.9 30,034.8 31,368.2 Per Share Data Total Assets 142,012.4 144,277.2 147,975.6 156,337.4 163,401.6 Core E P S (sen) 124.4 43.1 116.5 113.9 116.6 DP S (sen) 61 21 58 57 58 Borrowings 38,016.2 40,662.5 39,805.0 43,649.6 46,045.7 Book Value (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 (sen) 5.4 nm (3.7) 58.7 61.0 Deferred taxation 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 Trade payables 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 payables 329.6 336.4 407.3 697.4 500.8 E V/E BITDA (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 /BV (x) 1.3 1.3 1.2 1.1 1.1 Borrowings 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 BITDA margin (% ) 32.9 32.9 30.7 31.8 31.8 S hare capital 11,124.9 11,199.6 11,124.9 11,124.9 11,124.9 E BIT margin (% ) 20.1 19.9 17.8 19.1 19.0 Reserves 45,986.5 46,005.0 50,788.3 53,946.2 57,331.9 P retax margin (% ) 17.5 18.8 14.1 16.3 16.3 Minority interest 473.4 925.2 465.1 456.6 448.0 Net margin (% ) 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 margin (% ) 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 Cashflow Statement Liquidity ratios FYE Dec* (RM mn) 2017 2017** 2018E 2019F 2020F Current ratio (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 ratio (x) 1.7 1.9 1.8 1.9 1.9 Add: Net Taxes 729.9 (15.2) 315.2 546.4 559.3 Depreciation 6,105.0 2,049.9 6,372.7 6,457.1 6,641.3 Leverage ratios Net Interest 1,218.4 442.5 1,194.5 1,519.6 1,518.7 Gross Gearing (x) 0.7 0.7 0.7 0.7 0.7 Associates & J CE s (128.3) 44.7 (18.1) (77.0) (80.8) Net gearing (x) 0.6 0.6 0.6 0.6 0.6 Net chg in working cap (2,217.9) (2,629.2) (2,413.1) 658.9 457.3 Total Debt/ Assets (x) 0.3 0.3 0.3 0.3 0.3 Others (63.2) (651.4) 654.7 0.0 0.0 Interest Coverage (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^ Capex (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 Interest income 237.6 133.5 404.5 181.4 296.5 E BITDA (% ) 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 Investing (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 Change in debt 4,510.8 3,161.0 1,788.8 3,844.6 2,396.1 Interest paid (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 Cash F low 1,100.1 364.9 (1,427.7) 2,300.6 1,059.0 * 2016-17*: F Y E A ug F X 0.0 (2.4) 0.0 0.0 0.0 ** 4 months F Y E Dec Beginning Cash 3,956.1 5,056.2 5,056.2 3,628.5 5,929.1 ^ A djus ted 12 months for F Y 17** Ending Cash 5,056.2 5,418.7 3,628.5 5,929.1 6,988.0 Page 5 of 6

(THIS PAGE IS INTENTIONALLY LEFT BLANK) 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 Page 6 of 6