Period  3Q14/9M14

Actual vs. Expectations 3Q14 core profit of RM1.41b recorded, bringing 9M14 earnings to RM3.56b which made up 76% of our full-year FY14 estimates and 71% of market consensus. We deem this result to be above our expectations as we had expected another strong quarter in 4Q14 due to the 15% tariff hike in Jan 2014.

 The main discrepancy between the actual results and our estimates is the actual adjusted effective tax rate of 21.4% in 9M14 vs. our full-year assumption of 25%.

Dividends  No dividend was declared in 3Q14 as expected.

Key Results Highlights 3Q14 core net profit surged 35% to RM1.41b on the back of 15% hike in revenue, thanks largely to higher electricity demand and a full-quarter tariff hike impact against a 2-month impact in 2Q14. In fact, the electricity units sold in Peninsular rose 2.3% QoQ in 3Q14 after a 1.7% decline in the seasonally weak festive quarter in 2Q14. As such, the total electricity sales in Peninsular leapt 13% to RM10.04b from RM8.90b previously.

 Despite coal prices coming off 4% to USD74.6/mt, the total fuel costs, which include the IPP energy payment, rose again in 3Q14 by 23% QoQ from a 7% QoQ increase in 2Q14 as the group continued burning more expensive LNG as the two problematic coal fired IPP plants, namely Tanjung Bin and Jimah were still facing unplanned outages. LNG cost surged 30% QoQ to RM1.22b in 3Q14 from RM937.4m (average RM47.6/mmbtu from RM46.0/mmbtu).

 The rise in LNG cost was attributable to higher average daily gas volume which rose to 1,405mmscfd in 3Q14 from 1,383mmscfd where there was a full LNG cost pass-through in 3Q14 after the 1,000mmscfd subsidised gas supply whereas there was still a 1-month effect in 2Q14 (for month of Dec 2013) where the subsidised gas supply was set at 1,250mmscfd.

 On a YoY comparison, the 9M14 core earnings inched up 1% only to RM3.56b from RM3.52b previously, although revenue leapt 13% over the period. This was mainly driven by higher total fuel cost by RM3.28b to RM14.51b as the total gas/LNG cost surged 87% or RM4.14b over the period. The average coal price was USD76.5/mt in 9M14 from USD84.5/mt in 9M13.

 On debt exposure, total debt dropped slightly to RM26.4b (net debt: RM15.4b) as at May-14 from RM26.5b (net debt: RM13.0b) three months ago. Thus, gearing was also reduced to 40.0% (net: 23.3%) from 41.0% (net: 20.2%) previously.

Outlook  Expecting another strong quarter in 4Q14 given the 15% tariff hike in Jan 2014 while the higher fuel cost due to higher consumption of LNG would come off as the two problematic coal-fired IPPs are running well currently but the plants are still required to go on staggered planned outages for ratification works. While a review on tariff structure is expected every six months, we expect the tariff to stay unchanged at least till Dec

2014 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. By then, its financial performance would depend mainly on its operational efficiency.

Change to Forecasts    To reflect its latest effective tax rate and the new corporate tax rate of 24% from 25%, our new tax rate assumptions for FY14-FY16 are now estimated at 22%, 24% and 24%, respectively, from 25% flat rate previously. With no changes to other assumptions, we are upgrading our FY14-FY16 estimates by 4%, 1% and 1%, respectively.

Rating Maintain OUTPERFORM and TOP PICK for the power sector

Valuation  With unchanged target CY15 PER of 14.3x (5-year average), new price target is now raised to RM13.77/share from RM13.58/share previously.

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

Source: Kenanga