• 4Q18 (FYE Dec) core PATMI fell 56% qoq and 71% yoy to RM561m on lower revenue resulting from the annual revenue adjustment (ARA) for 2018 worth RM640m.

• Overall, 2018 core PATMI trailed ours and consensus at 90% and 88% respectively. It fell short of our estimates due to higher-than expected costs and wider losses at its associates.

• We reduced 2019F/2020F earnings respectively by 4%/3% mainly after updating for 2018 balance sheet figures which led to higher depreciation and interest expense.

• Downgrade to HOLD (from Buy) with lower RM14.30 DCF-derived TP. We like Tenaga for its defensive properties; expect share price pullback on poor headline figures. Buy on dips.

With new FYE ending Dec 31, there was no comparable quarter/period for YoY comparison. Hence, we selected the period over Dec 2016 to Nov 2017 as an approximation to give some sense of its performance.

Stunned by impairments

Tenaga’s 4Q18 performance marks its first quarterly headline loss since 4QFY11 arising from foreign asset impairments and forex translation losses (Table 2). Adjusting for these, core earnings was RM561m, which is still a poor showing. This was mainly due to the ARA, a retrospective revenue adjustment for changes in RP2 RIG, worth RM640m (Table 5). Else, 4Q18 core earnings amounts to RM1.0 bn (3Q18: RM1.27bn).

Falling short of expectations

For 2018, core PATMI fell 28% to RM5.6bn, falling short of both ours and consensus 2018 estimates to come in at 90% and 88% respectively. Against our forecast, the shortfall is explained by higher-than-expected costs (incl. depreciation), and wider losses at its associates.

On a more positive note – dividends!

On the flipside, the board declared a final DPS of 23sen. This brings total DPS declared for 2018 to 53.3sen, implying 54.5% payout based on core PATMI and in tandem with its dividend policy of 30-60% payout.

Minor tweaks

We mildly tweaked down 2019F/20F earnings by 4%/3% respectively on depreciation and interest expense after updating for 2018 balance sheet figures. We also lowered payout assumptions to 55% from 60% as 2018 DPS was slightly below our 54.3sen DPS target.

Downgrade to HOLD with lower RM14.30 TP

Downgrade to HOLD (from Buy) with lower RM14.30 (from RM14.60) DCF-derived TP. We expect the 4Q18 headline loss would likely stun market. Any pullback in share price makes a good entry. We remain proponents of Tenaga owing to its defensive attributes; the revised RIG provides better earnings clarity for the regulated business which explains 60-65% of profits. Current yields are also decent at 4-4.5%.

Source: BIMB Securities Research - 1 Mar 2019