• Tenaga’s 1Q Dec 2017 FYE (Sep-Nov) core earnings fell 13% yoy to RM1.9bn on higher opex, interest cost and associate slipping into the red due to losses at GMR, its Indian assets.

• Against estimates, EBITDA was broadly in line at 72% but core pretax trailed at 63% and core earnings at only 68%, mitigated by lower effective tax rate.

• Despite lower Commercial demand mix, overall net tariff rose 4% yoy to 38.8sen/kWh, possibly on favourable block usage mix. Peak demand hit a new high of 17,790MW in Oct 2017.

• Our call is under review while we retain our DCF-derived TP of RM17 pending RP2 updates into our estimates.

Impacted by higher input costs

Tenaga’s performance for 1QDEC17 was lacklustre. Core pretax (ex- forex translation gain and other provisions) fell 20% while core earnings fell 13%. The weak results were due to higher operating expense and interest costs, while associates slipped into the red on huge losses at GMR, its Indian investment. Against estimates, EBITDA was broadly in line at 72% though, but core pretax trailed at 63% and core earnings at only 68% - partially offset by utilisation of reinvestment allowance (RA) during the period.

Higher net tariff despite lower commercial mix

Overall demand rose 1.2% yoy to 28,150 GWh led by the Industrial segment (+4% yoy) while Commercial segment fell 2% yoy. The sales mix between Industrial, Commercial and Domestic segments were 40.6%/35.0%/22.3% versus 39.5%/36.1%/22.5% in 1QFY17. Despite weaker Commercial mix, net tariff (revenue ex-ICPT over total demand) rose 38.8 sen/kWh (+4% yoy). We believe this is due to favourable usage block mix within the segments as the peak demand hit a new high of 17,790MW in Oct 2017 (last peak was at the height of the El Nino season at 17,788MW in Apr 2016.

ICPT over recovery

After reporting two consecutive quarters (3Q/4QFY17) of under recovery, Tenaga saw an over recovery of RM197m in the Sep-Nov 2017 quarter. This would contribute towards the tariff rebate in 1H 2018 which amounts to RM929.4m. The savings was amassed from higher generation mix of coal (57%) and hydro (6%) while gas dipped to 37% compared to 53%/c.41% of coal/gas mix and similar hydro usage in 3Q/4QFY17.

Recommendation under review, maintain TP of RM17.00

Our recommendation is under review while our DCF-derived TP of RM17.00 remains unchanged. We still view Tenaga as a compelling investment case especially considering its revised dividend policy of 30-60% of PATMI which could see potential upside surprise.

Source: BIMB Securities Research - 28 Jan 2018