Tenaga’s 4QFY22 core PATMI of RM708.2m (-53.8% QoQ; -20.1 YoY) and FY22 of RM4.7bn (-7.5% YoY) was below our expectation (93.1%), but above consensus (107.9%). With sustainable earnings and improving cash flow in FY23, we do not discount for higher dividend payout for the year. Management has guided ICPT of RM12.0bn for 2HFY23 (vs. recently approved RM16.2bn for 1HFY23). Maintain BUY recommendation on Tenaga with an unchanged DCFE derived TP: RM11.65.

Below expectation. Tenaga reported core earnings RM708.2m (-53.8% QoQ; -20.1% YoY) for 4QFY22, bringing FY22’s sum to RM4.7bn (-7.5% YoY). We deem the results below our expectation (93.1%), due to lower than expected margins on hydropower generation and accelerated costs in 4QFY22. Nevertheless, FY122 was still above consensus (107.9%). The group recognised EIs of -RM1.2bn in FY22, mainly on Prosperity Tax (-RM340.8m), unrecognised forex loss (-RM249.5m) on depreciated RM and impairments for receivables and inventories.

Dividend. Declared a final dividend of 26 sen/share (ex-date: to be announced on a later date). Total dividend for FY22 was 46 sen/share (4.8% dividend yield), a 55.2% payout, in line with the group’s dividend policy of 30-60% of adjusted earnings.

QoQ. Despite flattish revenue +1.3%, core profit dropped by -53.8% to RM708.2m mainly due to lower allowable energy margin for hydropower generation (exceeded the pre-contracted energy margin), accelerated expenses for the group (see Figure #10), which was partially offset by the positive tax credits.

YoY/YTD. Despite the higher revenue, core earnings dropped -20.1% YoY and -7.5% YTD (to RM4.7bn), mainly dragged by: (i) higher depreciation charges (due to MFRS adjustment for EDRA Energy); (ii) higher net finance costs (higher debts); and (iii) lower associate contributions.

Outlook. Power demand growth remains healthy at +6.0% YoY (Peninsular) in FY22 (mainly due to low base) and is expected to leverage onto the country’s continued economic recovery in 2023. We expect Malaysia to achieve 4.0% GDP growth for the year. Under RP3 framework (2022-2024), the assumed demand growth was +1.7% YoY per annum. Management remains confident of earnings sustainability under RP3 framework while focusing to expand non-regulated earnings base, i.e. power generation, renewable energy and retail business segments.

Cash flow. We note that Tenaga’s receivables has further ballooned slightly to RM23.1bn (see figure #13) in 4QFY22 (vs. RM22.3bn in 3QFY22, due to timing mismatch of ICPT recognition and recovery). We expect the amount to drop in coming quarters following the higher approved ICPT amount (RM16.2bn) for 1HFY23 and the current downtrend of global coal prices in recent months. Government has already paid RM4bn in Jan (out of RM10.4bn subsidies) and the remaining portion will be paid in 5 equal instalments. Management is also guiding for ICPT of RM12.0bn for 2HFY23 based on current fuel price trend.

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 2023. The company is backed by stable earnings under RP3, with committed dividend payout policy.

Source: Hong Leong Investment Bank Research - 28 Feb 2023