NB: Our results review is based on pre-MFRS16 performance which corresponds with our forecasts. While the net impact of the adoption is minimal to PATMI, key cost items are not comparable to our estimates.

• 1Q19 core PATMI fell 16% yoy on higher depreciation, net finance costs and weaker associate/JV; effective tax rate also increased following the depletion of reinvestment allowance (RA) in 1Q19.

• On qoq basis, core earnings rebounded strongly due to the timing of maintenance opex and lower net finance cost which more than offset the impact of lower RA.

• Overall, 1Q19 core earnings were inline and made up 27% of ours and consensus expectations. No change to our estimates.

• Tenaga is one of our top picks for 2019. Our view of any potential restructuring to Tenaga/sector would not be overly disruptive was echoed by management during the briefing; this affirms our view that recent price weakness is unwarranted. Reiterate BUY.

Weaker showing but expected

Tenaga’s 1Q19 core earnings fell 16% yoy due to higher depreciation charge, net finance costs and weaker associate/JV contribution. These were exacerbated by higher effective tax rate (estimated at 1Q19: 27% and 1Q18: 14%) due to depletion of RA. Our core earnings adjusts for unrealised forex gain, impairments for receivables, investment in GMR and financial guarantee relating to GAMA, and the writeback of LTIP for staff which was provisioned in 4Q18 (Table 2).

Sequential rebound on timing of expenses

On qoq basis, core earnings rebounded strongly despite flat demand as we note that expenses eased possibly due to timing of key maintenance opex which are at times backend loaded. Net finance income also eased while associate contribution also improved. These had more than offset the impact from higher effective tax rate (4Q18: 25%).

Outlook remains healthy

1Q19 core earnings were inline with ours and the consensus estimates at 27% (based on Bloomberg data). We were hosted by the new CEO, Amir Hamzah, and other members of the senior management team for its 1Q19 results briefing. From the 90-minute session, some of the key highlights gathered are: i) more focus on boosting operating efficiency; ii) disruptive breakup of Tenaga is unlikely but retail service offerings would be expanded; iii) overseas assets to be strategized for better fit with Tenaga’s domestic business model instead of strategic stake.

Maintain BUY with RM14.30 TP

Reiterate BUY with RM14.30 DCF-derived TP. We seek comfort in the direction set by the new chief which is more of refining existing plans rather than a change in direction. Tenaga remains our top pick for its solid fundamentals and potentially generous dividend payout.

Source: BIMB Securities Research - 29 May 2019