Period 4Q13

Actual vs. Expectations The 4Q13 results were within expectations with core earnings of RM836.5m. This brought the full-yearFY13 core net profit to RM4.12b which is 4% and 2% below our as well as market expectations.

Dividends  NDPS of 15 sen was declared in 4Q13, bringing full year NDPS to 25 sen which is slightly lower our projection of 26.5 sen.

Key ResultsHighlights 4Q13 core earnings contracted 39% QoQ toRM836.5m from RM1.38b in 3Q13. This was mainlydue to higher opex by RM940.1m or 12% and aRM200m capacity payment saving for Tanjung Bin Power Plant in the preceding quarter. Although it still paid the gas price of RM13.70/mmbtu (vs. market price of c.RM43/mmbtu), TENAGA made a provision of RM348.9m (based on 1/3 cost sharing formula) in 4Q13 to account for the market gas price as it required more than the guaranteed Petronas’ supply of 1,250mmscfd. The gas supply reached c.1,289mmscfd on average in 4Q13 fromc.1,190mmscfd in 3Q13. In addition, the fuel cost compensation in 4Q13 was negative RM51.5m from RM592.4m compensation in the preceding quarter. Nonetheless, average coal price continued to decline to USD80.8/mt from USD84.4/mt.

 YoY, 4Q13 earnings declined 9% from RM914.9m on higher opex as the reasons above. FY13 core earnings rose 30% to RM4.12b from 3.17b due to higher electricity demand growth of 3.8% and a 19% contraction in average coal price to USD83.6/mt from USD103.6/mt.

Outlook  We still believe that a tariff review is imminent given the GE13 is already concluded and the LNG for the Melaka RGT is at a market price. On the other hand, 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 We have fine-tuned our FY14-FY15 assumptions on (i) USDMYR forex to 3.16 and 3.05 from 3.00 and 2.95; (ii) effective tax rate to 25% for both years from 30%; and, (iii) issued share based to 5,643.6m from 5,451.6m. Other key assumptions are maintained.

 Thus, FY14E-FY15E raised 3%-4% respectively.

Rating Maintain OUTPERFORM and TOP PICK for the power sector

Valuation  Following the earnings upgrade and the understated of issued share base previously, our new target price is now RM10.45/share from RM10.48/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 pass-through tariff kicks in.

Source: Kenanga