KUALA LUMPUR (Oct 30): CIMB Investment Bank Research (CIMB Research) has cut its earnings projection for Tenaga Nasional Bhd (TNB) for the financial years 2016 (FY16) and FY17 by 1% to 3% on the expected weak economic outlook next year.

In a note today, CIMB Research analyst Saw Xiao Jun said the research firm has lowered its electricity demand growth forecast to 2.5% from 3% for the next two years and TNB could see subdued growth next year on back of slower economic growth.

"Total electricity demand growth in Peninsular Malaysia also slowed to 2.2% in FY15, down from 2.5% in FY14," he said.

"As electricity demand correlates strongly with economic activities, the growth in FY16 could remain subdued given the weak economic outlook next year," he added.

Yesterday, TNB announced its fourth quarter of financial year 2015 (4QFY15) results, which showed that the national electricity supply provider saw its net profit decline 39.45% to RM820.9 million or from RM1.36 billion in 4QFY14 on the weakening ringgit against the US dollar and the Japanese yen.

Revenue was flat at RM11.744 billion in 4QFY15 compared to RM11.723 billion in 4QFY14, a filing with Bursa Malaysia showed.

TNB's FY15 revenue includes imbalance costs pass-through (ICPT) over-recovery amount of RM1.9 billion for period spanning Jan 1, 2014 to Aug 31, 2015.

For financial year ended Aug 31, 2015 (FY15), net profit declined 5.41% to RM6.12 billion or RM1.08 per share compared to RM6.47 billion or RM1.15 sen per share in financial year 2014 (FY14), while revenue increased 1.17% to RM43.29 billion from RM42.79 billion in FY14.

TNB attributed the decline in its net profit in the 4QFY15 to a foreign exchange translation loss of RM733.5 million compared to a gain of RM153.1 million recorded in the 4QFY14 due to the weakening ringgit against the US dollar and Japanese yen.

Saw said excluding the forex loss, TNB's core net profit rose 29% year-on-year (y-o-y) in 4QFY15 due mainly to lower tax expense, 8% higher than its forecast and 4% above consensus.

TNB's tax expense plunged 39% y-o-y despite core pre-tax profit rising 10% y-o-y, mainly due to the recognition of reinvestment allowance.

"On top of that, TNB's average tariff in 4QFY15 also inched up by about 1% y-o-y to 39.7 sen per kilowatt per hour. This boosted TNB's pre-tax profit by around RM60 million," he added.

As for the translation loss in 4QFY15, Saw said as at end-Aug 2015, TNB had about RM5.4 billion of non-ringgit debt, of which 67% was denominated in yen while the balance in US dollar.

However, Saw said that most of the translation losses were unrealised and may be reversed if the ringgit rebounds.

He also said TNB will benefit from the recently-announced extension of reinvestment allowance scheme under Budget 2016, which has been extended to 2018.

Saw said TNB is expected to sustain its low effective tax rate of around 10% to 15% for another six to eight years.

"This will allow TNB to continue to accumulate tax credit from its investments," he added.

Therefore, CIMB Research maintained its "add" call on TNB, albeit with a lower target price at RM15.70 from RM16.38.

Meanwhile, Public Investment Bank analyst Syarifah Hidayatul Akmal said the research firm estimates electricity demand to grow at around 2.2% to 2.5% next year.

"For FY15, total unit demand for electricity reported slower growth of 2.2% compared to 2.5% in FY14, with commercial and domestic demand growing only 2.5% and 2.9% respectively, compared with 2.8% and 3.8% in the same period last year," she said.

Despite this, she said the recognition of ICPT signifies the full implementation of fuel and generation costs pass-through mechanism under the power sector reform, which is beneficial to TNB as the framework would shield TNB from exposure to fluctuations in fuel and generation costs moving forward.

However, she said TNB's full year dividend of 29 sen, with final dividend of 19 sen declared by TNB, was "slightly disappointing" as it was below the research firm's expectations of 33.2 sen.

The research firm maintained its "outperform" call on TNB with a target price of RM14.64 due to its "defensive nature and undemanding valuation", which is trading at FY16 and FY17 forecasts of 10.2 times and 9.9 times.

(Note: The Edge Research's fundamental score reflects a company's profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations.)