Period     3Q13

Actual vs. Expectations   The 3Q13 results were above expectations with a set of commendable 9M13 core net earnings of RM3.28b, which accounted for 89% of our FY13 full-year estimates and 90% of the market consensus. 

The stronger-than-expected results were mainly due to (i) RM200m capacity payment savings in 3Q13; (ii) higher 9M13 electricity commercial demand growth of4.9% vs. our full-year assumption of 4.2%; and (iii) lower 9M13 average coal prices USD84.5/mt vs. our full-year assumption of USD92/mt.

Dividends    No dividend was declared as expected. 

Key Results Highlights   3Q13 core earnings soared 56% QoQ to RM1.38b as revenue rose 9% QoQ to an all-time-high of RM9.65b. The RM200m capacity payment savings (due to plant outage at Tanjung Bin Power Plant), higher demand from the commercial segment (which came with higher margin than other segments) and higher unit generated by hydro plant by 49% (no fuel cost) were the key earnings drivers. In fact, gas supply also improved significantly to 1,190mmscfd on average in 3Q13 from 1,081mmscfd in 2Q13. Fuel cost compensation leapt substantially to RM592.4m from RM42.2m.

YoY, 3Q13 core earnings surged 78% YoY from RM777.4m in 3Q12 while revenue grew 5% to RM9.65b from RM9.19b. The former was mainly driven by lower average coal price of USD84.4/mt vs. USD104.3m a year ago. YTD, 9M13 core net income jumped 46% to RM3.28b from RM2.25b due to a much lower average coal price of USD84.5/mt vs. USD107.5/mt, while 9M13 revenue rose 4% as electricity demand in Peninsular grew 4.1% for the same period.

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

Change to Forecasts    Given the stronger-than-expected 3Q13 result, we have upgraded FY13E by 16% on some fine-tuning such as; (i) lowering average coal price to USD90/mt from USD92/mt; (ii) increasing commercial electricity sales growth to 5% from 4.2% (thus overall power sales growth of 4.5% from 4.2%); and (iii) RM200m capacity payment savings.

FY14E-FY15E raised 1.0% each on higher base for electricity sales, although growth rate retained at 4.4% and 4.5% respectively. Other key assumptions are maintained.

Rating  Maintain OUTPERFORM and TOP PICK for the power sector

Valuation     Following the earnings upgrade, our new target price is now RM10.48/share from RM10.33/share previously, based on unchanged CY14 14x PER.

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

Source: Kenanga