Tenaga’s 1QFY18 core PATMI of RM2.0bn (inclusive of cost under-recovery of RM634.1m) was within our expectation and consensus. EBITDA margin has been stable since IBR and ICPT implementation in 2014. Currently, IBR and ICPT are still in effect until further review from the new government. Management remains positive on the net neutral impact from the review. Maintain BUY recommendation with unchanged DCFE-derived TP: RM17.50.

Within expectation. Tenaga reported strong 1QFY18 core PATMI at RM2.0bn, achieved 24.3% of HLIB forecast for FY18 and 27% of consensus. The core PATMI included fuel cost under-recovery of RM634.1m.

Stable EBITDA margin. Given the change in FYE to Dec (from Oct), there is no fair comparison for QoQ and YoY. However, comparing 1QFY18 (Jan-Mar 2018) to 1QFY12/17 (Sep-Nov 2017) and 2QFY08/17 (Dec-Feb 2017), Tenaga’s EBITDA margin has been relatively stable at 33-35% range, due to the effective implementation of IBR and ICPT mechanisms.

Stronger PATMI. Core PATMI rose from RM1.8bn (2QFY08/17) to RM2.0bn (1QFY18), mainly due to the higher electricity generation mix from Tenaga own power generation and commencement of Tenaga Manjung 5 coal power plant in 3QFY08/17.

IBR & ICPT. With recent political change, there is still no new appointment of the Minister of Energy (KETTHA) and hence Tenaga is still working closely with Energy Commission on the continued implementation of IBR & ICPT, until further review with KETTHA. Management remains positive on the upcoming ICPT announcement by end Jun 2018, with net neutral impact to Tenaga. Government had circa RM1.5bn in EIF (Electric Industry Fund) in early 2018 and would be utilizing estimated RM929m for electricity subsidy and rebate in 1H18, thereby leftover coffer of circa RM600m in EIF by end 1H18.

High fuel cost. TNB reported cost under-recovery of RM634.1m, indicating generation cost was higher than the benchmark under RP2, due to: 1) higher generation mix from more expensive gas power at 41.2% (vs. benchmark 33%) on outage of a number of coal power plant; and 2) increase in coal prices at RM361.7/mt (vs. benchmark RM315.9/mt).

Forecast. Post updates from annual report, we have made minor adjustment on FY18-19 earnings by lower 3.2% and 3.9% respectively.

Maintain BUY, TP: RM17.50. We maintain BUY recommendation on Tenaga with unchanged DCFE-derived TP: RM17.50. Tenaga’s earnings and cash flow are expected to be stable with the implementation of the IBR/ICPT mechanisms. The lowered 7.3% of regulated assets under RP2 (2018-2020) will be offset by higher asset base, new contributions from associates and power plants.

Source: Hong Leong Investment Bank Research - 28 May 2018