Tenaga Nasional - Sell-down Overdone; Upgrade To OP

Date: 29/05/2019

Source  :  KENANGA
Stock  :  TENAGA       Price Target  :  13.40      |      Price Call  :  BUY
        Last Price  :  13.66      |      Upside/Downside  :  -0.26 (1.90%)

The strong 1Q19 results are not unexpected given the seasonally lower opex and capex recognition. Having adopted MFRS16 from 1Q19, this will not impact its yearly earnings, which are regulated under the IBR of asset return of 7.3%. We see buying opportunity after it fell 13% in the past three months to below -2SD 2-year mean as the sell- down was excessive, in our view. Upgrade to OP with revised TP of RM13.40 and decent yield of c.4%.

1Q19 results met expectations. Although 1Q19 core profit of RM1.61b made up 29% each of house/street’s FY19 estimates, this strong set of results matched expectations as weaker results are anticipated in coming quarters as seasonally it incurs lower opex and capex recognitions in 1Q. There was no dividend declared during the quarter as it usually pays half-yearly dividends.

Lower opex boosted sequential results. 1Q19 core profit jumped by double QoQ to RM1.61b from RM0.82b on the back of 6% hike in revenue. The improved results were largely due to lower opex which fell 12% or RM1.42b over the quarter. It adopted MFRS16 in 1Q19, which saw a small net positive impact of RM22.8m adjusted for capacity payments, depreciation and finance cost. The 6% increase in top-line, despite fairly flattish for electricity sales, was due largely to a 41% or RM0.40b jump in ICPT under-recovery. Nonetheless, total fuel cost fell 1% to RM5.58b in 1Q19 as average coal price delivered fell 7% to USD91.8/mt or in MYR denomination by 9% to RM375.3/mt.

Higher fuel capped earnings from last year. Despite revenue rising 8%, which was led by 6% electricity sales growth in Peninsular Malaysia, 1Q19 core profit declined 9% from RM1.76b owing to a 21% jump in fuel costs as average coal price rose 9% from RM361.7/mt while average LNG price surged 22% to RM36.59/mmbtu. Meanwhile, the ICPT under-recovery jumped 116% to RM1.37b in 1Q19 from RM0.63b in 1Q18. With the additional 2.15 sen/kWh ICPT surcharge to be imposed in 1H19, we should likely see higher revenue in the coming two quarters.

Weaker results in coming quarters. Management maintained RM5.0b-RM5.4b normalised PAT target for FY19, which is after adjusting for the expected net negative c.RM300m impact under MFRS16. Under this accounting standard, we will see lower recognition for capacity payment but higher depreciation charge and finance costs. Nonetheless, under the Incentive Based Regulation (IBR), TENAGA’s earnings are expected to be stable with a regulated return of 7.3% in Regulatory Period 2 (RP2) over 2018-2020. In all, we keep our FY19-FY20 estimates unchanged.

Attractive after a 13% sell-down; upgrade to OP. TENAGA’s share price took a beating after its dismal 4Q18 results and management’s earnings guidance, which was RM1b lower than consensus, three months ago. This sent the stock lower by 13% since then but offering currently an attractive prospective FY20 PER of 11.7x which is lower than 2SD below its 2-year mean of 12.1x. As such, we believe the selling is excessive, and thus we upgrade the stock to OUTPERFORM from MARKET PERFORM. We also raised our target price slightly to RM13.40 from RM13.30 based on unchanged -1SD 2-year mean of 13.6x as we roll over the valuation base-year to FY20 from FY19. Main risk to our OUTPERFORM call is the change in ICPT mechanism, which will affect the entire operating costs structure.

Source: Kenanga Research - 29 May 2019

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