Tenaga’s 1HFY18 core PATMI of RM3.7bn (inclusive of cost under-recovery of RM879.3m) was within our expectation and consensus. We have adjusted the core earnings for the RM206m impairments for GAMA Energy, RM139m net provisions and RM81m forex loss. The fluctuation of the accrual accounting segment (-RM190.2m in 2QFY18 vs. +RM144.2m in 1QFY18) was mainly due to timing recognition. The segment is expected to revert back to positive again in coming quarters (improve earnings) while power demand remained strong. Maintain BUY recommendation with unchanged DCFE-derived TP: RM17.50.

Within expectation. Tenaga reported 2QFY18 core PATMI at RM1.7bn and 1HFY18 at RM3.7bn, achieving 46.0% of HLIB forecast for FY18 and 51.8% of consensus. The 1HFY18 core PATMI included fuel cost under-recovery of RM879.3m, but excluded impairment charges of RM206m for GAMA Energy, RM139m provisions (net of write backs) for receivables and RM81m forex loss.

Dividend. Approved first interim single tier dividend of 30.27 sen/share, representing a 51% payout of reported earnings in 1H18.

QoQ. Core earnings declined 16.7% due to movement in accrual accounting segment (see figure 2). The movement in this segment can sometimes be erratic from quarter to quarter due to timing recognition of unbilled revenue to customer. We expect this segment to return to positive (from current -RM190.2m in 2Q18) in coming quarter, which will improve earnings again. Adjusting for the movement in accrual accounting (unbilled revenue) portion, core PATAMI would have been similar for both 1QFY18 and 2QFY18 at RM1.8m. Net margin would also be stable at 14.9% in 2QFY18 vs 15.6% 1Q18.

Power demand growth. 1HFY18 Peninsular power demand growth was 2.7% YoY, driven mainly Industrial (4.3% YoY) and Domestic (4.1% YoY), while Commercial was flat YoY. Power demand is expected to remain in growth trajectory in 2HFY18, as the many parts of Malaysia are experiencing hot weathers at least until Oct 2018. Peak power demand has achieved another new high in Aug 2018 (figure #5).

TNB’s IPPs still on-going. Management allays the concerns on the cancellation of 4 unnamed IPPs announced by the new Energy Minister. Tenaga owned IPPs, namely Jimah East and Southern Power are not within the list of cancellation. Both power projects are still on track to commence in 2019 and 2020.

Foreign investments. Overall Tenaga’s foreign venture remained in the red, with the only exception of 20% owned Shoaiba (Arab Saudi) being profitable. GAMA Enerji (30%) was affected by the depreciation of Turkish Lira (due to USD denominated loan) and Tenaga has impaired RM206m on its investment into GAMA Enerji in 2QFY18. GMR Energy (30%) was affected by the constraint of gas and coal fuel supply. Nevertheless GMR Energy is benefiting from the approved coal cost past through by the court since early 2018. Investments into UK Solar (50%) and Windfarm (100%) are considered earnings positive to Tenaga after taking into account of shareholder loan interest.

Forecast. Unchanged

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 - 3 Sept 2018