1QFY17 core net profit at RM1.8bn (-7.9% yoy, +5.5% qoq) is within our expectations, as it constituted 77% of our 4-month FYE17 forecast. Despite EBITDA falling within our estimates, PBT fell short of our expectations due to unexpected losses arising from its associates and higher financing costs. However, the lower effective tax rate during the quarter has helped to compensate for the lower PBT. As a result, we are keeping our EPS and TP price unchanged, and Tenaga remains one of our country top BUY ideas.

ICPT to Remain Earnings Neutral in RP2

Although management didn’t provide any guidance on the potential profitability based on the new terms under the RP2, they did guide that any changes to the fuel cost will remain earnings-neutral. Management has also clarified that the RM930m of rebates will be borne by the system through savings in the RP1, and will not have any impact on Tenaga’s profitability. Management also guided that despite a shorter financial year, its current dividend policy of pay-out between 30-60% remains unchanged.

International Associate Losses Widen Unexpectedly

The associates and JV have been contributing around RM110m to RM130m a year over the past 3 years; however, during 1QFY17, the associates and JV have recorded losses of RM61m. The bulk of the losses were attributed to its overseas associate, GMR Energy, due to the ongoing court case with the state regarding the fuel-cost pass-through. Management believes that a court decision will be made known within the next few months. Apart from that, Vortex Solar and Gama Enerji were also loss-making during the quarter.

Maintain BUY and TP of RM18.00

We are maintaining our BUY call on the stock, with an unchanged DCFbased TP of RM18.00, as we believe that under the ICPT mechanism, the increase in fuel costs will continue to be earnings neutral to TNB, supporting the current pay-out. Although the losses from the associates were unexpected, the overall EBITDA profitability is still in line with our expectations. TNB remains our country top pick. A major risk lies in any changes to the current ICPT mechanism.

Source: Affin Hwang Research - 29 Jan 2018