Period  4Q14/FY14

Actual vs. Expectations  FY14 core profit of RM5.43b came in above expectations, which beat our estimates as well as market consensus by 11% and 5%, respectively.

 The better-than-expected results were attributed to (i) lower total fuel cost of RM17.99b vs. our assumption of RM20.40b; and (ii) lower taxation with actual adjusted effective tax rate of 19.1% vs. our assumption of 22%.

Dividends  19 sen of NDPS was declared, bringing FY14 NDPS to 29 sen as per our assumption.

Key Results Highlights  4Q14 core earnings plunged 31% QoQ to RM961.8m despite topline growing 2% over the period. This was mainly due to adjustment on revision of tax assessment in 4Q14. In 4Q14, TENAGA had written back RM189m provision for LPL with another RM52m for change in corporate tax rate. In fact, at pre-tax level, 4Q14 core PBT jumped 19% QoQ to RM2.15b from RM1.81b driven by: (i) higher revenue on higher electricity demand, and (ii) lower fuel cost as it burnt higher amount of cheaper coal fuel.

 Electricity demand in the Peninsular rose 4.6% QoQ which pushed total electricity sales in West Malaysia higher by 5% to RM10.51b. This round, TENAGA benefited from weaker coal prices as the two coal-fired IPPs came back into the system. The generation mix for coal has increased to 45.6% from 38.2% while fuel mix for gas was reduced to 49.9% from 55.9%. As such, TENAGA’s total fuel cost, which included IPP energy payment, reduced 9% QoQ as coal price continued to fall to USD72.9/mt in 4Q14 from USD74.6/mt in 3Q14 while the average requirement for the expensive gas was reduced 13% to 1,217mmscfd from 1,405mmscfd.

 For FY14, core earnings leapt 12% to RM5.43b from RM4.84b in FY13, mainly driven by a 15% jump in revenue after a 15% tariff hike which took effect in Jan 2014. The electricity unit sold in the Peninsular rose 2.5% in FY14, which was slower than 3.8% registered in FY13. During the year, total fuel cost surged 26% as it burnt more expensive gas/LNG as the two problematic coal-fired IPPs were under heavy maintenance. Fuel mix for gas rose to 54.5% from 47.3% while generation mix for coal was reduced to 39.8% from 44.5%. On average, the coal price was USD75.4/mt in FY14 from USD83.6/mt in FY13.

 On debt exposure, total debt dropped to RM25.5m (net debt: RM17.3b) as at Aug 2014 from RM26.4b (net debt: RM15.4b) three months ago. Thus, gearing was also reduced to 36.9% (net: 25.2%) from 40.0% (net: 23.3%) previously.

Outlook  We expect a tariff revision in the Dec-Review window given that there was no adjustment in the June-Review period. We believe the chance of tariff revision is high this time around given that the government has just approved the gas tariff adjustment for non-power sector last week. In any case, although the authority/TENAGA claims that any tariff adjustment will have neutral impact to TENAGA, we believe the integrated utility will still see net growth impact in earnings. In addition, as the two coal-fired IPPs, namely Tanjung Bin and Jimah are back into the system coupled with declining coal prices, TENAGA should be able to benefit from cheaper fuel cost. 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    We have fined-tuned our earnings assumption for fuel cost and fuel mix to reflect the current operational dynamics. This includes the changes in: (i) coal price to USD80/mt from USD95/mt for both FY15-FY16, (ii) oil price of USD95/bbl from RM102/bbl-RM110/bbl for FY15-FY16, (iii) fuel mix for coal to 47.8%-49.8% from 46.2%-48.2% for both FY15E-FY16E, (iv) fuel mix for hydro to 4.0% from 5.6% for both FY15E-FY16E, and, (v) USDMYR to 3.25-3.28 from 3.05-3.15 for FY15E-FY16E. As such, our FY15E-FY16E estimates have been raised by 0.3%-3.6%.

 At the same time, we launched our FY17 estimates where we expect earnings to grow at 3.6%. Key assumptions are: (i) 4.5% electricity demand growth, (ii) coal price of USD80/mt, (iii) gas price of RM15.20/mmbtu, (iv) LNG price of RM41.68/mmbtu, (v) oil price of USD95/bbl, (vi) coal fuel mix of 49.8%, (vii) gas/LNG fuel mix of 46.0%, and (viii) USDMYR of 3.32.

Rating Maintain OUTPERFORM

Valuation  As we expect a tariff hike in this coming review, we decided to upgrade our targeted CY15 PER slightly to 15x from 14.3x (5-year average) which we believe the valuation is not excessive given its sustainable earnings growth with index-linked heavyweight status while the market is currently trading at 17x multiple.

As such, the new price target for TENAGA is raised to RM14.65/share from RM13.77/share previously.

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

Source: Kenanga