Tenaga reported a muted set of results – despite a 1.8% revenue growth, 2QFY18 core net profit fell by 21% qoq to RM1.62bn due to higher generation costs. Seasonally, the April-Jun period is typically a higher cost period. Moving into 2H18, we expect generation costs to normalise. This, coupled with revenue growth should lift Tenaga’s profitability. Overall, Tenaga’s 1H18 core net profit of RM3.64bn (+6% yoy) is broadly within our expectations. The group declared 30.27 sen dividend for 1H18 (50% payout ratio). We maintain our earnings forecasts, BUY rating and TP of RM18.70.

1HFY18 Core Net Profit of RM3.64bn Is Broadly Within Expectations

Tenaga’s 1HFY18 core net profit of RM3.64bn is broadly within our expectations (47% of full year forecasts) but slightly above market expectations (51% of consensus full year forecasts). We expect revenue growth and lower generation costs to lift 2H18 earnings. Meanwhile, Tenaga’s headline net profit was lower at RM3.36bn due to forex translation losses and the recognition of RM207m impairment on its investment in Turkey-based Gama Enerji, where the investment value was impacted by the significant depreciation of the Turkish lira.

Sequentially, Core Earnings Fell by 21% on Higher Generation Costs

Notwithstanding a 1.8% revenue growth (driven by industrial and domestic segments), Tenaga’s 2QFY18 core net profit fell by 21% qoq to RM1.61bn due to seasonally higher generation costs. In 2QFY18, the IPP cost accounted for 31% of revenue while fuel cost had inched up to 22% of revenue, both ratios are at the higher end of their historical averages, partly attributable to a change in generation mix (lower generation from hydro).

Maintain BUY With An Unchanged TP of RM18.70

We maintain our earnings forecasts, BUY rating and DCF-based 12-month TP of RM18.70. Overall, we expect the government to maintain the current ICPT mechanism, and the increase in fuel cost will continue to be earnings neutral to Tenaga, supporting its current payout. Tenaga is also our preferred pick for the sector, and is one of our Malaysia’s Top Buy ideas. Downside risks include higher-than-expected losses from its associates and changes to the current IBR/ICPT.

Source: Affin Hwang Research - 3 Sept 2018