Tenaga (TNB) reported a relatively good set of numbers, 6M19 core PATAMI of RM3,051m (-16.3% yoy) came in slightly ahead of both consensus and our expectation (55% of street and our full-year forecasts). TNB’s core operation remains stable as the normalised EBITDA of RM7.62bn is flat yoy (vs. RM7.68bn in 6M18). The beat was due to higher contribution from associates & JV and the lower effective tax rate. As such, we have revised our EPS forecasts for 2019-21 by 3.2%-9.1%, and increased our TP to RM14.20, while maintaining our HOLD call.

Core Operation Remains Stable

TNB’s normalised EBITDA for 6M19 is flat at RM7.62bn, compared to the RM7.68bn in 6M18. Overall non-generation cost was down by 3.5% yoy for 6M19, contributed by the 28% qoq decline in staff cost in 2Q19 to RM875.5m. The qoq decline came as a surprise to us, given that in 1Q19 there was a reversal of a LTP provision of RM209m. We believe that if TNB can maintain the current cost structure, it should be able to hold on to its current profitability. Staff cost is the biggest cost component under the non-generation cost.

International Operation Surprises on the Upside

The biggest positive surprise during the quarter was the significant improvement of its international associates and JV, which contributed to around RM88m of profit in 2Q19, a sharp reversal of the RM6m loss in 1Q19. Vortex is the standout as its EBITDA increased from USD20m to USD25m in 6M19. We had previously forecast that its associates and JV would continue to be loss-making in 2019, but we are now forecasting a profit contribution of around RM130m, an improvement from the RM183m loss in 2018. The lower effective tax rate during the quarter has also helped elevate the overall performance of TNB.

Maintaining HOLD With Higher Revised TP of RM14.20

We are raising our FY19-21 EPS forecasts by 3.2%-9.1% to factor in the better performance of its international operation and lower tax rate. Despite lifting our 12-month DCF-based TP to RM14.20, we are maintaining our HOLD call due to the limited upside. Risks to our thesis include unexpected losses from its associates and changes to the current incentive-based regulations and imbalance cost-pass through arrangement.

Source: Affin Hwang Research - 3 Sept 2019