• Overview. 2Q19 core profit fell 14% yoy on lower IBR returns and MFRS16 impact (ex-MFRS16: -6% yoy). On qoq basis, profits eased 4% on lower unbilled revenue and higher finance costs (MFRS16 impact) but partly offset by positive tax charge and associate.

• Key highlights. As guided, 2Q19 MFRS16 adjustment increased and led to a net deficit of RM112.2m (1Q19: +RM22.8m). Contribution from Associate turned positive on strong performance at Vortex Solar. The positive tax charge in 2Q19 was due to reversal of tax provisions and positive deferred tax charge, in tandem with lower unbilled revenue.

• Against estimates: inline. 1H19 core earnings were 56% of ours and 55% of consensus estimates mainly due to lower-than-expected effective tax rate.

• Dividend. 1H19 30sen DPS (1H18: 30sen) was declared and implies a 56% (1H18: 46%) payout. We assumed 55% payout for 2019F.

• Outlook. We expect 2H19 to come in weaker with more MFRS16 adjustments expected to be dialled in. Management also guided for effective tax rate to normalise at c.22-24% for 2019F.

• Our call. Maintain HOLD with an unchanged RM14.25 DCF-derived TP. Our analysis found Tenaga to be a dependable stock to outpace the KLCI in the last 4 out of 6 market routs since 1996. Buy on dips.

Source: BIMB Securities Research - 31 Aug 2019