• Tenaga reported its 4-month Dec 2017 (Sep-Dec) performance in which core earnings amounted to RM2.6bn.

• Against our estimates, EBITDA and EBIT were broadly in line but core PATMI trailed at 93% mainly on the net interest cost and effective tax rate.

• Despite lower Commercial demand mix, we estimate realised tariff (ex-ICPT) amounted to 39.5sen/kWh for the 4- month period, possibly due to favourable block usage mix.

• As per its dividend policy, an interim DPS of 21.4sen has been declared bringing total payout to RM1.2bn or c.45% of PATMI.

• Downgrade to HOLD with an unchanged DCF-derived TP of RM17. Despite less positive outlook under RP2, we believe its new payout policy could retain interest towards the stock.

A decent performance

Tenaga reported its 4-month 2017 transition financial year-end which was over Sep-Dec 2017. In the final month of the transition FYE, core earnings came in at RM696m to bring the total 4-month core earnings to RM2.6bn. This trailed our estimates of RM2.8bn or at 93%. Operationally, EBITDA and EBIT were inline.

Easing margins and ICPT swings

Overall, we note that EBITDA margins in the period stabilised at c.34% which is slightly lower than the 35% realised in FY17 (Aug YE). We believe this was due to higher Commercial demand mix in FY17 of 35.7% vs 35% in the 4-month Dec 2017 YE. Interestingly, ICPT for the 4-month period reduced to only RM50m of over-recovery from RM197m in the Sep-Nov 2017 period – implying an under-recovery of RM146m in Dec 2017. Management attributed this swing to higher coal price +15% vs average in FY17 (Aug YE).

What to expect in RP2

In RP2, we understand that there are several changes to the RIG (Regulated Industry Guidelines). This include: i) reclassification of Distribution unit out of the Customer Service and classified under the Revenue cap model; ii) redefinition of the Price cap model for the Customer Service which is now fixed at the reference tariff of 39.45sen/kWh; and iii) lower WACC of 7.3% (from 7.5%) on the Regulated Asset Base (RAB).

Downgrade to HOLD with unchanged TP of RM17.00

We downgrade Tenaga to HOLD with an unchanged DCF-derived TP of RM17.00. Despite RAB returns being higher than expected (7%), we see earnings prospects under RP2 to be less positive. With the Price cap model being redefined, it eliminates benefit from favourable sales mix, leaving volume and operating efficiency to provide earnings upsides. However, these are balanced off by its new dividend policy which could retain interest on the stock.

Source: BIMB Securities Research - 1 Mar 2018