Tenaga’s 1QFY19 core PATMI of RM1,592.7m was above our expectation and consensus, mainly due to higher than expected group’s tariff and lower than expected operational costs. Raise earnings by 2.5% for FY19 and 1.4% for FY20 and introduce FY21 earning at RM6,343m. Following the earnings adjustment, we raise our DCFE-derived TP to RM13.65 (from RM13.10) and upgrade our recommendation to BUY (from Hold) given the higher TP and the recent sell down. TNB’s fundamental remain solid, with strong cash flow under IBR.

Above expectations. Tenaga’s reported 1QFY19 core PATMI at RM1,592.7m, achieved 27.9% of HLIB forecast for FY19 and 28.1% of consensus, due to higher than expected net tariff for the group and lower than expected total operational costs despite the implementation of MFRS16 and regulatory adjustments of RM523.9m. We have excluded the impact of RM279.7m impairment on financial instruments (including RM135.7m for GAMA’s financial guarantee), RM198.3 impairment on GMR and reversal of RM221m for staff’s LTIP scheme during the quarter.

Dividend. None.

QoQ. Core PATMI increased 73.0% as 4QFY18 was dragged by the various accounting adjustments for RP2. 1QFY19 core PATMI reflects a normalized quarter earnings.

YoY. Core PATMI dropped 15.2% due to 1) implementation of MFRS16 accounting for finance lease, resulting lower RM22.8m in total operating cost (including depreciation and amortization and finance cost); 2) lower associate losses; and 3) higher tax expenses (no further Reinvestment Allowance Incentive in FY19).

MFRS16. Implementation of MFRS16 (finance lease) has resulted lower net operational and finance costs of RM22.8m in 1QFY19. However, management guided the net savings to reverse back in subsequent quarters as new lease commitments commence. Management reiterated net negative impact of RM340m for FY19.

Foreign investments. TNB recognised further impairments in relation to GAMA (RM135.7m financial guarantee) and GMR (RM198.3m) during 1QFY19 as management is still expecting continuous fuel and regulatory challenges. On a positive note, management does not expect further cash injection into GAMA as GAMA’s new CCGT plant will commence operation in 2HFY19 to improve GAMA’s cash flow and concurrently GAMA is in the midst of restructuring its loan. On the other hand, GMR has already contributed profit (despite immaterial) to TNB in 1QFY19.

New management focus. Management remains focus on long term expansion of its international footprint and renewable energy in order to enhance its non-regulatory income segment. In the short term, management is focusing on improving its cost and operational efficiency with digitalization and automation while exploring new revenue platform i.e. broadband services, power management and RE consultancy.

Forecast. Raise earnings by 2.5% for FY19 and 1.4% for FY20. Introduce FY21 PATMI at RM6,343m.

Upgrade to BUY, TP: RM13.65. Following the earnings adjustment, we upgrade our recommendation to BUY (from Hold) on Tenaga with higher DCFE-derived TP: RM13.65 (from RM13.10). We believe Tenaga’s current share price has been overly sold down, while the group’s fundamental remain solid under the IBR structure. Based on 50% payout of RM5.9bn, the potential dividend would be c.50 sen/share, a decent 4.3% dividend yield.

Source: Hong Leong Investment Bank Research - 29 May 2019