• 4Q18 core profit performed strongly due to combination of a low -base effects against past quarters which is compounded by lower opex and interest expense, as well as effective tax rate.

• Overall 2018 core earnings exceeded our expectations mainly due to lower-than-expected interest expense and effective tax rate; at the operational level (ie. EBITDA/EBIT) earnings were inline.

• A final 3.5sen DPS was declared, bringing 2018 DPS to 5.6sen and exceeds our 5sen forecast. Payout is pending approval in AGM.

• Despite a strong 4Q18 performance, we remain cautious over its outlook owing to TB4’s reliability risks (UOR to be reset only in 2020/21F) and limited cashflow accretion from acquisition of AF.

• HOLD with RM0.82 DCF-derived TP; adding AF could boost value by RM0.10, we estimate. Dividend yields are hard to ignore while TB4 reliability is an inherent risk; sell on strength.

A strong end

4Q18 core earnings surged over qoq and yoy basis to RM101m, due mostly to low-base effects which were compounded by lower interest expense and opex as well as recovery in associate contribution. It was worth noting that at EBITDA level, earnings rose 7% qoq and 9% yoy to c.RM600m – the highest since 2Q17. Interestingly, the qoq growth was despite lower capacity payment especially at TB4.

Surprised by non-operating ‘improvements’

At the operational level (ie. EBITDA/EBIT), earnings were inline with our 2018 forecasts. However, core profits exceeded our estimates by 29% and consensus by 18%. The ‘surprises’ were as a result of lower-thanexpected interest expense and effective tax rate.

TB4 operational review

Based on the Daily Logsheet report by the Grid System Operator, TB4’s operations only resumed on 26 Oct (outage on 10 Sep). It lasted throughout Jan 2019, possibly signalling the worst is over. Still, with its UOR limit only being reset in 2020/21F, any unscheduled outage till then would impact profits.

No changes for now

No changes to our forecasts pending better clarity on its effective tax rate and the acquisition of Alam Flora (AF).

Maintain HOLD with RM0.82 TP

Its share price has recovered mildly ahead of the 4Q18 results release. Despite the corresponding strong performance and attractive dividend yields, we continue to see TB4’s stability as an inherent risk, at least, up to the resetting of its UOR threshold in 2020/21F. Sell on strength.

Source: BIMB Securities Research - 25 Feb 2019