Tenaga’s 2QFY19 core PATMI of RM1,331.7m (-16.4% QoQ; -13.4% YoY) and 1HFY19 of RM2,924.5m (-20.2% YoY) were within our expectations (49.9%) and consensus (52.5%). The drop was mainly due to accounting adjustments for IBR components and MFRS 16. Approved first interim dividend of 30sen/share for 1H19. Following share price rise upwards to our DCFE derived TP: RM13.65, we downgrade our recommendation to HOLD (from Buy), as we believe current share price has already reflected the fundamentals of the group.

Within expectations. Tenaga’s reported 2QFY19 core PATMI at RM1,331.7m and 1HFY19 at RM2,924.5m was within HLIB expectation (49.9%) and consensus (52.5%). We have excluded the impact of RM369.6m 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 in 1HFY19. Management clarified the impact of MFRS 16 was +RM22.8m in 1QFY19 and -RM135m in 2QFY19.

Dividend. Board of Directors have approved a first single tier interim dividend payout of 30sen/share (details to be announced in due course).

QoQ/YoY/YTD. Core PATMI declined 16.4% QoQ/ 13.4% YoY/ 20.2% YTD, dragged by: 1) refund of IBR components effective FY19; 2) higher adjusted staff costs; and 3) negative MFRS 16 impact of RM135m in 2QFY19 and RM112.2m in 1HFY19. These were partly negated by the improved associate contribution and lower effective tax rate (reversal of tax provisions in 2QFY19).

MFRS16. Implementation of MFRS16 (finance lease) has resulted increase in net operational and finance costs of RM135m in 2QFY19 and RM112.2m in 1HFY19. Management has previously guided net negative impact of RM340m for FY19.

Foreign investments. All foreign investments were operationally profitable in 2QFY19, with the exceptional on GMR Energy, which was boosted by assets disposal gain in the quarter. Nevertheless, we take comfort that GAMA Energy had returned to the black, while earnings for Vortex Solar had improved substantially.

MESI 2.0. Management expects government (MESTECC) to announce power reform policy MESI 2.0 in early Sep 2019. We do not anticipate material impact from the new policy, which is widely understood to introduce competitive elements within the power sector (power generation and power retail). We expect Tenaga’s main asset Power Transmission and Distribution to be protected under RAB structure, while Tenaga’s ongoing Power Generation assets to be protected under the PPA structure for their remaining period.

Forecast. Unchanged.

Downgrade to HOLD, TP: RM13.65. Following the increase in share price to our DCFE-derived TP: RM13.65, we downgrade our recommendation to HOLD (from Buy). Tenaga earnings are expected to be sustainable at current level with stable cash-flow and dividend payout. However, we believed the current share price has already reflected the fundamentals of the group. A first interim dividend of 30sen/share would imply potential full year dividend at 60sen/share, translating into potential dividend yield of 4.3% at current share price of RM13.96.

Source: Hong Leong Investment Bank Research - 3 Sept 2019