Tenaga’s 3QFY19 core PATMI of RM1.2bn (-6.3% QoQ; +12.1% YoY) and 9MFY19 of RM4.2bn (-7.9% YoY) were slightly below HLIB expectation (71.2%) on higher than expected group general expenses, but within consensus (74.9%). Cut earnings by 6.5% for FY19, 7.1% for FY20 and 10.0% for FY21. Maintain HOLD with lower DCFE derived TP: RM13.50 (from RM13.65). We believe current share price fairly reflects the fundamentals of the group.

Below expectation. Tenaga’s reported 3QFY19 core PATMI at RM1.2bn and 9MFY19 at RM4.2bn, slightly below HLIB expectation (71.2%) due to higher than expected group general expenses, but relatively in line with consensus (74.9%). We have excluded the gain of RM145.5m liquefied damages for Jimah East Power (JEP), partially offset by RM40.2m provisions and RM18.0m inventory write off. Management clarified the impact of MFRS 16 was +RM202.7m in 9MFY19 and expect another RM200m in 4QFY19 following the targeted commencement of JEP in Dec 2019.

Dividend. None.

QoQ. Core PATMI declined 6.3%, mainly due to higher effective tax rate.

YoY. Despite the negative impact of RM90.5m on MFRS 16 implementation, core PATMI improved by 12.1% mainly driven by turnaround of JV/associates contribution with lower effective tax rate.

YTD. Core PATMI declined by 7.9%, dragged by: 1) refund of IBR components effective FY19; 2) higher adjusted staff costs; and 3) negative MFRS 16 impact of RM202.7m. These were partly cushioned by the improved associate contribution and lower effective tax rate (reversal of tax provisions in 2QFY19).

MFRS16. Implementation of MFRS 16 (finance lease) has resulted increase in net operational and finance costs of RM90.5m in 3QFY19 and RM202.7m in 9MFY19. Management guided for a net negative impact of ~RM400m for FY19 due to commencement of Jimah East Power in 4QFY19.

Foreign investments. All foreign investments were operationally profitable in 3QFY19, with the exceptional on GMR Energy. Management is strategizing to eventually exit India given the continued uncertainty of the market.

MESI 2.0. Management maintained that TNB would remain a monopoly for T&D segment while the Retail segment would be open up to competition. We do not anticipate material impact from the new policy given the immaterial profitability of the Retail segment for the group. However, the restructuring of power generation PPA contracts to tender bid system would post earnings risks to TNB’s Generation segment.

Forecast. Cut earnings by 6.5% for FY19, 7.1% for FY20 and 10.0% for FY21.

Maintain HOLD, TP: RM13.50. We maintain to HOLD with lower DCFE-derived TP: RM13.50 (from RM13.65) following the cut in earnings. Tenaga’s earnings are expected to be sustainable at current level with stable cash-flow and dividend payout. However, we believe the current share price fairly reflects 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 3.6% at current share price of RM13.56.

Source: Hong Leong Investment Bank Research - 4 Dec 2019