Tenaga’s 2QFY22 core PATMI of RM1.2bn (+4.2% QoQ; +1.0% YoY) and 1HFY22 of RM2.4bn (-9.8% YoY) was within our expectation (48.5%) and consensus (54.6%). Despite the surge in fuel energy costs, we expect earnings to sustain into 2HFY22, protected under RP3 framework. However, we expect Tenaga’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 an unchanged DCFE-derived TP: RM11.65, with its stable earnings and committed dividend payout policy. Declared an interim dividend of 20 sen/share.

Within expectations. Tenaga’s core earnings for 2QFY22 came in at RM1.2bn (+4.2% QoQ; +1.0% YoY), bringing 1HFY22’s sum to of RM2.4bn (-9.8% YoY). We deem the results within our expectation (48.5%) and consensus (54.6%). The group recognised EIs of -RM662.5m in 1HFY22, mainly on Prosperity Tax (-RM257.3m), forex loss (-RM194.5m) and impairments for receivables and inventories.

Dividend. Declared an interim dividend of 20 sen/share (book closure and payment dates to be announced in due course)

QoQ/YoY. Despite the record high revenue of RM19.1bn by +22.0% QoQ/+53.5% YoY,

core earnings of RM1.2bn was relatively flattish +4.2% QoQ/+1.0% YoY, as the jump in revenue was mainly attributed to combined ICPT and regulatory adjustments of RM6bn during the quarter (see Figure #4). These adjustments were meant to offset the incurred higher fuel generation costs (vs. reference price) from the surge in coal price (see Figure #11) and higher gas price during the quarter.

YoY. Core earnings declined by -9.8% YoY to RM2.4bn, mainly due to lower hydropower generation and lower Tenaga’s own power generation, as well as higher negative impact of MFRS16 by RM187.7m (see #Figure #3).

Outlook. Power demand growth remains healthy at +5.7% YoY (Peninsular) in 1HFY22, and we expect demand to remain strong for 2HFY22 in tandem with country’s strong economic recovery momentum. However, the assumed growth was only +1.7% YoY per annum under RP3 framework (2022-2024). Management remains confident of earnings sustainability under RP3, despite the increasing global fuel prices, as witnessed in the group’s 1HFY22 performance.

Cash flow. We note that Tenaga’s receivables has further ballooned to RM19.3bn in 2QFY22 (vs. RM14.2bn in 1QFY22; RM10.7bn in 4QFY21), mainly due to the continuous surge in fuel generation costs during the period. Furthermore, there was time lag effect of the approved imbalance cost pass-through of only RM7bn in 2HFY22, as compared to RM9.4bn imbalance cost pass-through recognised in 1HFY22 and the deferred RM2.4bn from 2HFY21. We expect cash flow to be dragged by the ongoing mismatch from fuel cost pass-through in the near term. Tenaga’s borrowings has also ballooned to RM62.6bn in 2QFY22 (vs. RM53.4bn in 1QFY22; RM51.7bn in 4QFY21). Management indicated the government will guarantee Tenaga’s financing of up to RM6bn to fund the additional costs. We expect the government to continue honouring the RP3-ICPT mechanism.

Forecast. Unchanged.

Maintain BUY, TP: RM11.65. We maintain BUY on Tenaga with unchanged DCFE derived TP: RM11.65, 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 - 1 Sept 2022