Tenaga reported a weaker-than-expected performance for 9MFY18 as core-PATAMI of RM4,603m delivered only 60% and 65% of our and the street’s respective full-year forecasts. The weak 3QFY18 core profit of RM959m (-41% yoy) was due to higher operating costs and also higher losses from its associates. As such we are lowering our EPS forecasts by 3.1%-10% for FY18-20E and reducing our DCF-based TP to RM18.00 from RM18.70, but we maintain our BUY call.

Higher Operating Costs Dampen Profitability

Management guided that the 3QFY18 performance is not a true indicator of Tenaga’s profitability, as its EBITDA of RM3.4bn fell short of the normalised EBITDA of around RM3.7bn-RM3.9bn/quarter. During 3QFY18, its ex-generation cost increased by 14% qoq or RM270m. The increase was higher than expected, but management alluded that some components of the cost will likely normalise in the coming quarters. The RM220m increase in staff cost was due to an adjustment made relating to the collective agreement for its executive-level staff.

Writing Off GAMA

Tenaga has fully written off its investment (total of RM498m) in Gama Enerji Anonim Sirketi due to the further weakening of the Turkish Lira, which led to higher forex translation losses. We believe that the bulk of the RM91m of losses recorded by the associates during the quarter is related to GAMA. As Tenaga has written off GAMA from its books, Tenaga would no longer need to record the losses on its books for the upcoming quarters. Unless the Turkish Lira appreciates sharply against the USD, it is very unlikely GAMA will turn profitable soon.

Maintain BUY But With a Lower TP at RM18.00

We cut our DCF-based TP to RM18.00 from RM18.70 on the back of an earnings cut of 3.1%-10.0% for FY18-20E to factor in higher operating costs, while maintaining our BUY call. We continue to believe that the government will maintain the current ICPT mechanism, and the increase in fuel costs will continue to be earnings neutral to Tenaga. Downside risks include higher-than-expected losses from its associates and changes to the current IBR/ICPT.

Source: Affin Hwang Research - 28 Nov 2018