Tenaga’s 9MFY18 core PATMI of RM5.0bn (inclusive of cost under-recovery of RM1.4bn) was below our expectation and consensus, dragged by the run-up in group generation cost (mainly related to LPL, SESB and accounting MFRS 117) in 3QFY18. Cut earnings by 14.5% for FY18, 11.7% for FY19 and 8.4% for FY20. Maintain BUY recommendation with lower DCFE-derived TP: RM16.40.

Below expectation. Tenaga reported 3QFY18 core PATMI at RM1.3bn and 9MFY18 at RM5.0bn, achieved 61.8% of HLIB forecast for FY18 and 70.3% of consensus, dragged by run-up generation costs adjustments for LPL (Pakistan power generation), SESB (Sabah Electricity) and accounting change MFRS 117. The 9MFY18 core PATMI included fuel cost under-recovery of RM1.4bn, but excluded impairment charges of RM598.1m for GAMA Energy (fully written off to zero book value), RM220m adjustments for Collective Agreement (for non-executive staffs), RM424.8m provisions (net of write-backs) for receivables and RM247.3m forex translation loss.

Dividend. None.

QoQ. Core earnings slumped further by 24.9% in 3QFY18 mainly due to large movement of group generation cost of RM904.7m while revenue only increased by RM576.9m. We understand that the incremental in generation cost that was not covered under ICPT, are mainly related to SESB, LPL and MFRS 117 accounting.

Power demand growth. 9MFY18 Peninsular power demand growth was 2.7% YoY, driven mainly Industrial (4.7% YoY) and Domestic (3.1% YoY), while Commercial was flat YoY. Power demand is expected to remain in growth trajectory in FY18 on the back of GDP growth of 4.8%.

Foreign investments. Overall Tenaga’s foreign venture remained in the red, with the only exception of 20% owned Shoaiba (Arab Saudi) contributing sustainable profits and Vortex Solar (50%) became profitable in the quarter due to summer season in UK. GAMA Enerji (30%) was affected by the depreciation of Turkish Lira (due to USD denominated loan) and Tenaga had fully impaired another RM296.6m (on top of RM206m) on its investment into GAMA Enerji. GMR Energy (30%) was affected by the constraint of gas and coal fuel supply. Windfarm (80%) was considered earnings positive to Tenaga after taking into account of shareholder loan interest.

Forecast. Cut earnings by 14.5% for FY18, 11.7% for FY19 and 8.4% for FY20.

Maintain BUY, TP: RM16.40. We maintain BUY recommendation on Tenaga with lower DCFE-derived TP: RM16.40 (from RM17.50). Tenaga’s longer term 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 Nov 2018