Period  1Q14

Actual vs. Expectations

 The 1Q14 results came in strong than expected with core earnings of RM1.29b making up 28% of both our full-year FY14 estimates as well as that of market consensus.

 This was largely due to lower effective tax rate of 7% on reinvestment allowance. However, at EBITDA level, profit margin dropped YoY to 28% from 31% pressured by higher fuel cost.

Dividends  No dividend was declared as expected.

Key Results Highlights 1Q14 core earnings surged 55% QoQ to RM1.29b from RM836.5m due to the said

reinvestment allowance as well as a tax credit of RM188.7m on tax provisions to reflect the change in corporate tax to 24% from 25%. At EBITDA level, 1Q14 EBITDA rose 18% to RM2.68b from RM2.27b mainly driven by lower IPP costs by 12% to RM2.99b from RM3.40b as the 2 coalfired plants namely Tanjung Bin and Jimah Power plants continued to be in unplanned outages.

 However, total fuel costs in 1Q14 grew 9% QoQ attributed to higher generation costs from burning more expensive LNG (average RM45/mmbtu) as the said unplanned outages of two coal-fired power plants. plants. In view of the lower availability factor for coal-fired power plants, TENAGA did not enjoy the benefit of lower coal prices in 1Q14, which averaged at USD77.2/mt from USD80.8/mt in the preceding quarter.

 The gas supply reached an average of 1,321mmscfd in 1Q14 from 1,230mmscfd previously. As such, TENAGA incurred RM600m cost sharing based on 50% (as the Energy Commission changed the sharing ratio to 50:50 between TENAGA and Petronas from one-third each between TENAGA, Petronas and the government). This RM600m cost sharing included RM473.1m of LNG fuel cost in 1Q14 and the balance is the adjustment from the preceding quarter.

 On a YoY comparison, the 1Q14 core earnings leapt 23% from RM1.02b in 1Q13, largely due to the said lower taxation as well as higher top-line which rose by 5%. However, total gas fuel cost was higher by 28% or RM396.8m in 1Q14 while fuel cost for coal dropped to RM1.22b from RM1.33b as average coal price slid to USD77.2/mt from USD84.4/mt in 1Q13.

 On debt exposure, total debt dropped slightly to RM23.0b (net gearing: RM12.6b) as at Nov-13 from RM23.2b (RM13.7b) three months ago. As such, gearing also slid to 38.3% (net: 21.0%) from 39.6% (23.3%) previously.

Outlook  The new tariff rates, which took effect from 1st of Jan 14, are expected to boost bottom-line by RM1.17b per annum. While a review on tariff structure is expected in every six months, we expect the tariff to stay unchanged at least for the next 12 months given the recent wave of subsidies cut, which had resulted in rising living cost and inflationary pressure. Moving forward, when a new set of fuel cost pass-through mechanism is in place, TENAGA’s earnings are expected to stabilise. Its financial performance would then depend mainly on its operational efficiency.

Change to Forecasts Although the 1Q14 results were stronger than expected, we maintain our earnings estimates for now as 2Q14 will be a more reflective quarter for the impact on the new tariff.

Rating Maintain OUTPERFORM and TOP PICK for the power sector

Valuation  We have upgraded our target CY14 PER slightly to 14.3x based on five-year average from 14.0x previously, which was at the higher end of the PER band in the past four tariff reviews. As such, the new price target for TENAGA is RM12.33/share from RM12.07/share previously.

Risks to Our Call A slow down in economy growth which will affect electricity demand.

Source: Kenanga