Period     2Q13

Actual vs. Expectations     The 2Q13 results were above expectations with a respectable set of 1H13 core earnings of RM1.90b, which accounted for 56% of our FY13 full-year estimate and 53% that of the market consensus. The stronger-than-expected results were mainly due to a lower coal cost with a 1H13 average actual coal price of USD84.6/MT vs. our assumption of USD97/MT.

Dividends     A 10 sen NDPS was declared in 1H13 compared to the 5 sen announced in 1H12.

Key Results Highlights     The 2Q13 core earnings contracted by 13% QoQ mainly due to a 36%-jump in staff cost (+RM242.6m) while electricity sales in Peninsular also declined by 1%. Coal cost inched up slightly to USD84.7/MT from USD84.4/MT while the average daily gas supply improved 3% to 1,081mmscfd from 1,051mmscfd. Fuel compensations meanwhile plunged to RM42.2m from RM538.5m in 1Q13. All these contributed to the overall deterioration in the EBITDA margin to 27% from 31%.

On a YoY comparison, the 2Q13 core profit jumped 20% from RM735.2m in 2Q12 as the 2Q12 results were previously hit by high coal prices of an average USD109.3/MT while electricity sales were also higher in 2Q13 by 5.0% in Peninsular and 8.6% in Sabah. For the YTD, the 1H13 core earnings surged 29% to RM1.90b from RM1.48b in 1H12 thanks largely to a lower average coal price of USD84.6/MT vs. USD109.3/MT in 1H12 while electricity sales also rose 4.4% over the year in Peninsular.

Outlook     A tariff review is expected post-GE13, likely to be in the Jun review window, which also coincides with the new gas supply from the Melaka RGT in Jun.

When a new set of fuel cost pass-through mechanisms in place, TENAGA earnings are expected to stabilise. Its financial performance will depend mainly on its operational efficiency.

Change to Forecasts      We have raised our FY13E EPS by 8% as we lowered our coal price assumption to USD92/MT from USD97/MT. However, there is no change to our FY14 estimate as our coal price assumption is maintained at USD95/MT for the year.

We have also raised our FY13-FY14 NDPS by 25% after revising upwards our earnings payout assumption to 50% from 43.5% previously.

Rating      Maintain OUTPERFORM

Valuation     Following the earnings upgrade, our new price target is now at RM8.56/share from RM8.05/share previously, based on a CY13 PER of 13x from FY13 13x PER previously.

Risks     The government’s ability to continue its compensation (or via a stabilisation fund) before the fuel cost pass-through tariff kicks in.

Source: Kenanga