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TNB 'buy', MAHB 'add'


TENAGA NASIONAL BHD

By Maybank Investment Bank Research

Buy

Target Price: RM16.20

WHILE Tenaga Nasional Bhd’s (TNB) results for the nine months of financial year 2017 (9MFY17) were below expectations, it is unlikely to raise a major concern as its cause is non-recurring due to the reversal of interest income on the power purchase agreement (PPA) savings, according to Maybank Investment Bank (IB) Research.

The stock remains Maybank IB’s top pick for the sector, given its compelling valuation and stable earnings profile.

Based on the research firm’s prediction that regulatory developments will most probably not adversely affect the utility’s profitability, it reiterates its “buy” call, with a marginally lower target price (TP) of RM16.20.

The third quarter of financial year 2017’s (3QFY17) net profit of RM1.75bil brings 9MFY17 core net profit to RM5.16bil. This makes up 68% of Maybank IB’s full year forecasts, implying the results were below expectations.

The research house said the higher-than-expected finance cost was the culprit as TNB reversed previous interest income on PPA savings, which was responsible for around a RM150mil gap.

The 9MFY17 generation cost declined 0.1% year-on-year (y-o-y) on the back of a corresponding 0.7% demand growth. Coal’s proportion of 3QFY17 generation increased to 52.8% as previously shut coal plants resumed operation.

Given the sequential price increases of both subsidised gas and liquefied natural gas, and with coal prices still high at RM329/tonne, TNB under-recovered on generation cost of RM507mil in 3QFY17.

The cumulative buffer of PPA savings and Imbalance Cost Pass-Through (ICPT) payables stood at RM2.5bil at end-May 2017.

This would inevitably be reduced going forward, though, especially given further under-recovery of generation cost, and the already committed tariff rebate of 1.52sen/kilowatt hour for the second half of 2017 (2H17).

MALAYSIA AIRPORTS HOLDINGS BHD

By CIMB Research

Add (no change)

Target Price: RM9.52

MALAYSIA Airports Holdings Bhd (MAHB)’s share price has risen 44% year-to-date (YTD) after it secured a concession extension and as its traffic growth rose to double-digit levels.

In late January, MAHB announced its extension from 2034 to 2069 to its Malaysian concession from the government, thereby extending it from 25 years to 60 years.

Also, MAHB delivered 11.2% year-on-year (y-o-y) traffic growth in Malaysia during six months of 2017 (6M17), the highest since 2013. Additionally, international traffic growth at Istanbul Sabiha Gokcen airport, of which MAHB owns 100% interest, rose back to positive territory.

In CIMB Research’s view, the current share price now reflects all of the above, along with the expected passenger service charge hike at KLIA2 come Jan 1 2018, as well as an implicit 30% rise in landing charges, also from Jan 1.

However, in the near term, several factors may hinder the share price momentum.

MAHB renegotiated its staff collective bargaining agreement in the second quarter of 2017 forecast (2Q17F), where the salary increment was backdated to Jan 1, 2017 and would be booked entirely in the second quarter (2Q).

Also, the warranty period for KLIA2 expired at end-April 2017, so repair costs beyond that point are the responsibility of MAHB.

In terms of revenue, as airlines’ load factors are now close to 90%, further volume growth will be difficult without more aircrafts. Malaysia Airlines is planning to cut its 737-800 fleet by six units to 48 planes by end-2017, while the 494-seat A380s will be removed from service by May 2018, being replaced by smaller 287-seat A350s to London.

While the Malaysian concession has been extended, the terms are yet to be negotiated. Negotiations now include Malaysian Aviation Commission, an independent regulatory body with powers to determine landing charges and PSC rates.

CIMB Research worries this system might override the Operating Agreement’s provisions in technical matters.

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