• Tenaga have been a fairly safe stock to invest/hold during market routs; on 6 occasions in the past, it outperformed the CI 4 times and came out stronger post-event, while underperformed twice.

• Under the IBR Framework regime and better clarity on its direction with the new management, we expect less earnings volatility going forward.

• We expect the upcoming 2Q19 results to come in weak on more MFRS16 accounting adjustments. We pare down our 2019-21F estimates by 7-9.5% to reflect the adverse impact to accounting profits. Cashflow remains largely unchanged.

• Maintain HOLD with a new DCF-derived TP of RM14.25 (from RM14.30). Fundamentals are intact, in our view, while the reorg portends to potential value unlocking that could enhance its sum of-parts by c.40%. Accumulate on dips.

Recession fears setting in

Until the dust settles, we expect market sentiment to remain nervy. As in prior years, sharp market corrections coinciding with global/regional economic crises would drive down 10-year MGS yield close to the 3% threshold (Chart 1). MGS yield eased to 3.2% in recent weeks, signalling recession fears setting in, we opine.

Sanctuary amidst uncertainties

Tenaga’s share price over the past year hardly reflect its strong fundamentals although the rebound in recent months seem to imply concerns on its outlook has ebbed. Ahead of growing macro concerns, we believe Tenaga offers a reliable haven during crises. On 6 occasions observed since 1996, it outperformed the CI on 4 and typically came out stronger post-events, while underperformed the CI twice (Chart 2). Structural changes such as the IBR Framework also insulates cashflows.

Cranking up the voltage

We believe the ongoing reorg shared by management should assuage concerns over Tenaga’s position in MESI 2.0. It also portends to possible value unlocking of the GenCo which may enhance collective value of the entity by c.40%, we estimate (Table 5).

2Q19 preview

Tenaga would be announcing its 2Q19 results on Friday, 30 Aug. We expect earnings to come in weaker on higher accounting losses due to the MFRS16 adoption. We pare down 2019-21F estimates by 7-9.5% (Table 3) though we note that cashflows remain largely intact.

Maintain HOLD with lower RM14.25 TP

We retain our HOLD call with a lower DCF-derived TP of RM14.25 (Table 4). Fundamentals remain solid while its ongoing reorg should boost interest towards the stock. Accumulate on dips.

Source: BIMB Securities Research - 29 Aug 2019