Tenaga reported a disappointing set of numbers for 2018, corePATAMI of RM5,215m delivered only 70% and 82% of our respective forecasts. Guidance provided by management indicates a lower profit based moving forward, due to lower regulatory returns and losses from its foreign associates. As such we are cutting our EPS forecast by 24%-27% for 2019-20E and reduce our DCF-based TP to RM13.30, and downgrade our call to HOLD from Buy.

Guiding for a Lower Profit Base

Management has guided that the profit base in RP2 should be around RM5bn-RM5.4bn, which is lower than what we had previously forecasted. The difference is due to the price and revenue cap set in RP2, which limits Tenaga’s ability to earn additional returns above the regulated return from its asset base. Losses from its associates overseas are also unlikely to recover, hence the decision to make an impairment of around RM1,065m for its investment related to two its international associate (GAMA and GMR).

There Are Still Avenue of Growth

Despite guiding a lower base profit for 2019, there are still avenue of growth that will help drive Tenaga profitability. Jimah East Power (2,000 MW) is on schedule to achieve COD by end-2019, and Southern Power Generation (SPG) will achieve COD by mid-2020. Management has also indicated that they are evaluating the commercialisation potential of its fibre network, but only interested in a wholesale model. No guidance was provided as to the capex required for this potential new venture.

Downgrade to HOLD But With as We Cut TP to RM13.30

We have cut our 2019-20E EPS forecast by 24-27%, after factoring in the lower profit base. We have also lowered our DCF-based TP to RM 13.30 (from RM18.00) and downgrade our call to a HOLD from Buy, on the back of the earnings cut. Risks to our thesis include higher/lower-than-expected losses from its associates and changes to the current IBR/ICPT.

Source: Affin Hwang Research - 1 Mar 2019