Tenaga’s 1QFY22 core PATMI of RM1.2bn (+36.0% QoQ; -18.9% YoY) was within our expectation (23.2%) and consensus (25.1%). Management guided FY22 to sustain with an expected power demand growth of +1.7% YoY, in tandem with the recovery of Malaysia’s economy. Earnings will also remain sustainable under RP3 framework. However, we expect TNB’s cash flow to be affected in the near term due to the mismatch of ICPT recognition and approval timing. We maintain our BUY recommendation on Tenaga with a lower DCFE-derived TP: RM13.40 (from RM13.60), with its stable earnings and committed dividend payout policy.

Within expectation. Tenaga’s core earnings for 1QFY22 was RM1.2bn (+36.0% QoQ; -18.9% YoY). We deem the result within our expectation (23.2%) and consensus (25.1%). The group recognised EIs of -RM207.6m in 1QFY22, mainly on Prosperity Tax (-RM113.9m) and impairments for receivables and inventories.

Dividend. None.

QoQ. Core earnings improved by +36.0% QoQ to RM1.2bn mainly due to regulatory adjustments of RM286m and accelerated opex in previous quarter.

YoY. Core earnings declined by -18.9% YoY, mainly due to lower hydropower generation and lower Tenaga’s own power generation, as well as higher negative impact of MFRS16 by RM100m.

Outlook. Power demand growth remains healthy at +4.0% YoY (Peninsular) in 1QFY22 and management expects full year growth to achieve +1.7% YoY in tandem with the expected recovery of Malaysia’s economic activities (GDP forecasted +5.3% to +6.3%; HLIB: +5.5%). Management remains confident of earnings sustainability under RP3, despite the increasing global fuel prices. We note that Tenaga’s receivables has further ballooned to RM14.1bn in 1QFY22, from RM10.5bn in 4QFY21, mainly due to the time lag effect of approved fuel cost pass-through of only RM1.7bn in 1HFY22, as compared to RM4.5bn imbalance fuel cost pass-through recognised in 2HFY21. We expect cash flow to be dragged by the ongoing mismatch from fuel cost pass-through in the near term. Nevertheless, we expect the government to continue honouring the RP3-ICPT mechanism.

Forecast. Post updating our model, we adjusted earnings for FY22 by -2.6% and FY23 by -0.9%. Introduce FY24 earnings at RM5.7bn.

Maintain BUY, TP: RM13.40. We maintain BUY on Tenaga with adjusted DCFE derived TP: RM13.40 (from RM13.60), as the utility-co leverages on the economic recovery in 2022. The company is backed by stable earnings under RP3, with committed dividend payout policy.

Source: Hong Leong Investment Bank Research - 31 May 2022