Tenaga (TNB) reported decent 1Q19 results; core PATAMI of RM1,573m (+186% qoq; -23% yoy) is largely in line with our and consensus forecasts: 28.5% and 27.9% of full-year estimates respectively. The strong 1Q numbers were supported by higher sales volumes and also lower staff costs. However, we are maintaining our EPS estimates as we believe the performance would normalise in 2Q19. We keep our DCF-based TP unchanged at RM13.30, but upgrade our call to BUY from HOLD on valuation given 14% upside.

Keeping Its Guidance on Profit Base Unchanged

Although 1Q19 core PATAMI of RM1,573m is ahead of management’s guidance, management is still keeping its profit base guidance of RM5- 5.4bn unchanged. We believe that the cost structure during the quarter is not sustainable, as the RM209m reduction in staff cost was due to the reversal of the LTIP provision provided in previous quarters. Apart from the lower cost, TNB also benefited from despatching higher electricity volume, which was higher than the historical average at 5.2% yoy.

Being Conservative in Assessing Its International Investment

During 1Q19, TNB also recorded an impairment of around RM334m on its investment related to GAMA and GMR, as management is taking a conservative approach despite the RM1bn impairment it recorded in 4Q18. Management continues to believe that these assets are crucial for their future growth due to the limited opportunities in Malaysia. However, as the operating environments in those countries remain challenging, we do not discount the possibility of Tenaga injecting new equity into them.

Upgrade to BUY With An Unchanged TP of RM13.30

We are keeping our EPS forecasts unchanged, as we expect profitability to normalize in the next few quarters. We upgrade our stock call to BUY from HOLD due to its undemanding valuation as we keep our DCF-based TP unchanged at RM13.30. Risks to our thesis include higher-thanexpected losses from its associates and changes to the current IBR/ICPT.

Source: Affin Hwang Research - 29 May 2019