Tenaga reported its FY17 (Sep-Dec 2017) core net profit of RM2,426m which is within our expectation, as its constituted 103% of our 4- month FYE17 forecast. We have tweaked our demand forecast to reflect the demand trend and raised our EPS by 2.2%-2.4% for 2018- 19E, which lead to a higher TP of RM18.70. Maintain BUY.

Lower Allowable Return in RP2 Is Not Bad

While the results are within market expectations, the concern during the analyst briefing continues to revolve around the profitability of the company under RP2. Management has guided that although the WACC (allowable return) is now lower, the regulated asset base will be higher than RP2, hence it is unlikely to see a significant decline in earnings in the immediate term. Also in RP2, as we switch to revenue cap replacing the previous price cap, it helps to mitigate the impact of the lower electricity demand growth, which has been growing <2.5% for the past 2 years.

Still Got Upside to Dividend Payout

Since revising up the dividend policy of paying at least 30-60% of profit as dividend, management has declared 50% payout for FY17 (which is in line with our base case scenario). We believe moving forward as there is more clarity on the impact of RP2 on its cash flow, management could potentially increase the dividend payout to 60%, which could act as a re-rating catalyst for the stock.

Maintain BUY With Higher TP of RM18.70

We are maintaining our BUY call on the stock, with a higher DCF-based TP of RM18.70, 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 - 1 Mar 2018