• Tenaga posted a decent 4QFY17 core earnings which was flat yoy while FY17 core earnings eased 3% to be inline with our estimates at 96% but ahead of consensus’ by 6%.

• Qoq, 4QFY17 core earnings fell 17% to RM1.9bn on lower tariff realized, higher opex and effective tax rate.

• Tenaga declared a final DPS of 44sen which brings YTD DPS to 61sen – its highest payout – implying 50% dividend payout.

• We pared down 2017-19F earnings by 6-11% on changes to our cost, tax rate assumptions and minor housekeeping.

• BUY with a lower DCF-derived TP of RM17 (from RM18.55). We like the stock for its stable FCF under the IBR regime which largely led to the new dividend policy yielding higher DPS.

A decent end

Tenaga ended its FY17 campaign with 4QFY17 core profits coming in flat yoy while full year earnings eased 3% as demand normalises. The one-off items includes: i) deferred tax expense of RM300m in 3Q, and ii) interest income on PPA Saving Fund worth RM150m being expensed in 3QFY17 after the fund was transferred to the Energy Commission.

Stronger growth if not for higher tax and interest cost

Despite chalking stronger revenue in FY17 (due to higher realized tariff), gains were sapped by higher effective tax rate which rose to 14.8% (FY16: 8.4%). FY17 EBITDA grew by 8% but was partially offset by higher interest expense (+40%), resulting in core pretax profits rising by only 5% to RM9.4bn (adjusting for EI at pretax).

Demand trend

Overall, electricity demand rose 5% qoq and 2% yoy in 4Q17 to 28,265GWh led by the Industrial segment while Domestic noted some respite, rising 10% qoq to 6,586GWh. For FY17, total demand grew 1% to 109,986 GWh due to respite in Industrial demand.

Bumper dividend declared

Tenaga announced a surprise final DPS of 44sen. This brings the total DPS declared in FY17 to 61sen or a total sum of over RM3bn which implies a 50% payout ratio. This is in line with its new policy to distribute 30-60% of its PATMI. We had assumed a 46sen DPS.

Mild cuts to earnings

We made mild cuts to our forecast as we factor in higher effective tax rate (guided to be c.20% from FY18 onwards) and revisit our cost assumptions. These lower 2017-19E earnings by 6-11%.

Maintain BUY with a lower DCF-derived TP of RM17.00

BUY with a lower DCF-derived TP of RM17.00 (from RM18.55). We continue to believe that the stock warrants a re-rating given its stable FCF generation post-IBR.

Source: BIMB Securities Research - 27 Oct 2017