Tenaga Nasional Berhad’s (TNB) 2QFY23 reported core net profit of RM662.6m, dipped by 26.7% QoQ and 41.5% YoY respectively. Cumulatively, the Group recorded core net profit of RM1,566.9m in 1HFY23, weaker by 20.1% YoY and lagging our and consensus full year estimates at 36% and 34% respectively. The weak performance was mainly dragged by negative fuel margin from its domestic generation business arising from the difference between Applicable Coal Price (ACP) and Moving Average Price (MAP) of its inventory. To quantify the impact, its domestic generation business EBIT reduced to RM408.6m in 1HFY23, dropping by 74.5% from RM1,601.6 in 1HFY22. Management guided that the situation may prolong until 4QFY23 with narrower negative fuel margin over the period on the back of stable coal prices. All in, we cut our earnings by 25% and 12% for FY23F-24F to account for the normalized fuel price. We retain our Outperform call though with lower DCF-derived TP of RM11.50 (from RM12.42).

• Reached new peak demand in 2QFY23. The Group recorded new peak demand of 19,716MW in May 2023 from 19,183MW in 2022 likely due to the notably warmer weather. In tandem with this, it recorded higher revenue by 3.8% with overall electricity demand growth of 3.3%, largely lifted by the domestic (+9.0% YoY) and commercial segment (+7.1% YoY). The industrial segment remains a drag as demand shrank by 4.2% YoY.

• Prolonged negative fuel margin to impact FY24. In 1HFY23, coal price futures dropped significantly by ~70%. Though both ACP and MAP will decline in tandem with the futures price, MAP will have a lagging effect due to coal inventory purchased during the elevated prices, while ACP which is set by Energy Commission (EC) tracks the futures faster than MAP. For instance, the base ACP (RM27.52/mmbtu) used for billing the generators was lower than the coal price paid to supplier (RM29.43/mmbtu) in 2QFY23, causing the negative fuel margin. The situation may prolong until 4QFY23 as illustrated in Figure 1 with narrower negative margin. Additionally, the losses were exacerbated by higher proportion of coal generation to 60.1% in 2QFY23 from 53.7% in 1QFY23.

• Improved working capital. The Group has fully recovered its Imbalance Cost Pass Through (ICPT), amounting RM10.4bn and lowered its net debt position to RM43.8bn from RM50.8bn in 4QFY22. The increasing cash balance will ease its working capital requirements and would be used to pare down its debt. On another positive note, TNB has been successful in its court case against the Inland Revenue Board (IRB) to set aside the RM4bn tax claim, which removes a significant overhang since December 2019.

Source: PublicInvest Research - 28 Aug 2023