Tenaga’s FY18 core PATMI of RM5.4bn was below our expectation and consensus. The disappointment was mainly related to the adjustment of RM639.8m under revenue cap structure of IBR 2018-2020 as well as continued losses from associates GMR (India) and GAMA (Turkey). Cut earnings by 22.3% for FY19 and 25.8% for FY20. Following the earnings adjustment, we downgrade our recommendation to HOLD (from Buy) on Tenaga with lower DCFE-derived TP of RM13.10 (from RM16.40).

Below expectation. Tenaga’s reported 4QFY18 core PATMI at RM440.9m and FY18 at RM5.4bn, achieved 78.4% of HLIB forecast for FY18 and 84.7% of consensus. This was dragged by an adjustment of RM639.8m for IBR 2018-2020 (incurred in 4QFY18) as well as continued losses from associates GMR (India) and GAMA (Turkey). FY18 core PATMI included fuel cost under-recovery of RM2.3bn, but excluded impairment charges of RM598.1m on GAMA Energy (fully written off to zero book value) and RM304.7m on GMR Energy, as well as impairment of RM269.9m for financial guarantees made to GAMA.

Dividend. Proposed a final single tier dividend of 23 sen/share, bringing full year dividend to 53.3 sen/share (3.85% dividend yield), which was below HLIB and consensus expectation of 60 sen/share, following the earning disappointment.

QoQ. Core earnings slumped further by 74.0% in 4QFY18 mainly due to the reversal of RM639.8m from revenue due to excess revenue and earnings generated by the regulated assets under the new revenue cap structure of IBR 2018-2020. The reversal was meant to pass-back the RM639.8m excess to consumers in the form of lower average tariffs for the period Jan-Jun 2019.

Power demand growth. FY18 Peninsular power demand growth was 2.6% YoY, driven mainly Industrial at +4.4% YoY and Domestic at +2.8% YoY, while Commercial was flat YoY relatively flat at +0.5% YoY. Power demand is expected to remain in growth trajectory in FY19 on the back of healthy GDP growth of 4.7%. However, we note that, any excess growth in power demand vs the growth assumption under IBR will not benefit Tenaga, as Tenaga will need to pass-back the excess revenue to consumers due revenue cap measure of IBR. Similarly, TNB would be able to recover any loss of revenue from consumer in the event power demand falls behind the growth assumption under IBR.

Foreign investments. The losses from GAMA (Turkey) and GMR (India) are not expected to recover in the near term and hence Tenaga has adopted prudence financial measures in impairment its investments in GAMA and GMR.

Forecast. Cut earnings by 22.3% for FY19 and 25.8% for FY20.

Downgrade to HOLD, TP: RM13.10. Following the earnings adjustments, we downgrade our recommendation to HOLD (from Buy) on Tenaga with lower DCFE derived TP: RM13.10 (from RM16.40). With the IBR in place, Tenaga’s longer term earnings and cash flow are expected to be stable amidst at a lower earnings base of RM5.5bn (guided by management). Based on 50% payout of RM5.5bn, the potential dividend would be c. 50 sen/share (3.7% dividend yield).

Source: Hong Leong Investment Bank Research - 1 Mar 2019