• 3Q18 (FYE Dec) core earnings fell 23.1% qoq to RM1.3bn; apart from lower returns under RP2, earnings were exacerbated by higher depreciation, finance cost and effective tax rate.

• Overall, 9M18 core earnings were inline with ours at 76% but trailed consensus at 71%.

• 3Q18 saw under-recovery of RM480m mainly due to increase in coal price and higher generation mix by gas; this brought 9M18 under-recovery to RM1.4bn.

• Maintain HOLD with an unchanged RM15.50 DCF-derived TP. We like Tenaga for its defensive properties; should payout hits 60% dividend yields could be c.5% at current levels. Buy on dips.

As Tenaga adopts a new financial year ending December, there was no comparable quarters. Nevertheless, we have illustrated in the earnings table summary below, the most comparable quarter to 3Q18/9M18 for some sense to its performance.

Headline distortion

3Q18 headline earnings distorted its performance as profits crumbled to just RM501m. This was caused by several one-offs/non-cash items: i) GAMA Enerji impairment of RM291.5m, ii) forex translation loss of RM166.7m, iii) one-off contractual agreement with non-executive staff of RM208m and iv) net impairments and write-offs on inventories and receivables of RM170.7m. Otherwise, 3Q18 core earnings stood at RM1.3bn, bringing 9M18 core earnings to RM5.1bn – inline with our estimates at 77% but trailed consensus at 71%.

Exacerbated decline

While the lower returns on regulated asset base (RAB) has been largely anticipated, this was worsened by higher depreciation as Janamanjung 5 achieved COD, higher finance cost with more borrowings taken to fund foreign acquisitions, and higher effective tax rate with some of its ITAs expire.

Healthy electricity demand still

In tandem with less number of working days in 3Q18, the electricity demand fell 0.3% qoq, led by the Commercial segment, but was up 2.8% yoy to 28,916 GWh underpinned by stronger Industrial and Domestic demand. For the 9M18 period, electricity demand rose 2.7% to 84,991 GWh. Peninsular Malaysia’s electricity demand also hit a new peak demand of 18,338 MW in Aug 2018.

Maintain HOLD with RM15.50 TP

Maintain HOLD with a DCF-derived TP to RM15.50 (from: RM17) which implies 2018/19F PE of 13.3x. Despite lower returns in RP2, we are still proponents of the stock owing to its defensive properties. Our forecasts imply dividend yields of 4.8% (Table 1) at current prices should Tenaga boosts the payout to 60% (our forecast assumes a 50% payout as per historical trends). Buy on dips.

Source: BIMB Securities Research - 28 Nov 2018