Period

2Q15/1H15

Actual vs. Expectations

Headline 2Q15 net profit of RM2.16b raised 1H15 net profit to RM4.51b which appears very strong against house/street’s FY15 full-year estimates of RM5.46b/ RM6.48b.

However, adjusting for: (i) RM257.4m forex translation gains, (ii) RM771.9m reinvestment allowance, and (iii) c.RM1.5b over-recovery of fuel costs, 1H15 core net profit would be RM2.49b.

Annualising the core net profit and adding back the RM727m additional operating cost arising from the 2.25 sen/kWh rebate, the 1H15 set of results would be 4.5% above our estimates which we deem to be within expectations.

Dividends

A 10.0 sen NDPS was declared in 2Q15 which is the same as in 2Q14.

Key Results Highlights

Despite topline sliding 4% to RM10.61b, 2Q15 core earnings rose 7% QoQ to RM2.46b, largely attributable to lower: (i) fuel cost by RM542.6m or 13% (RM3.79b vs. RM4.33b), and (ii) general expenses by RM134.7m or 31%. This was largely offset by the increase in: (i) staff cost by RM144.6m or 18%, and (ii) other operating expenses by RM145.0 or 83%. As such, 2Q15 operating expenses were reduced by RM381.3m or 5% to RM8.04b from RM8.42b in 1Q15.

The decline in revenue was expected due to the CNY holiday effect which saw electricity demand in the Peninsular dipping by another 1.4% QoQ, led by commercial (-1.8%) and domestic segments (- 3.6%). This caused the total electricity sales in West Malaysia to fall by 2% to RM10.01b. However, TENAGA continued to enjoy lower fuel cost, such as average coal price, which fell further to USD66.4/mt from USD70.2/mt in 1Q15 with coal generation mix increasing slightly to 47.0% from 46.3%. Note that the gas generation mix fell to 45.9% from 49.2% while hydro generation mix surged to 7.0% from 3.3% which we believe was due to the flood in Dec 2014. As such, the average daily gas requirement fell sharply to 1,060mmscfd in 2Q15 from 1,218mmscfd previously.

For YoY comparison, 1H15 core net earnings jumped 51% to RM4.77b, without adjusting for the RM1.5b fuel cost over-recovery, from RM3.16b in 1H14. This was due to: (i) 11% jump in revenue after a 15% tariff hike in Jan 2014, and (ii) RM740m or 8% saving in fuel cost. Meanwhile, average coal price dropped 12% to USD68.4/mt from USD77.5/mt while average daily gas volume declined 16% to 1,139mmscfd from 1,352mmscfd as gas generation mix fell to 47.6% from 56.2% previously. Coal generation mix for the same period rose to 46.6% from 37.5% previously.

On debt exposure, total debt rose slightly to RM25.6b (net debt: RM21.6b) as at Feb 2015 from RM25.3b (net debt: RM20.4b) three months ago. However, gearing reduced slightly to 35.3% (net: 29.8%) from 35.6% (net: 28.7%) previously.

Outlook

After a strong 1H15, TENAGA is likely to face a weaker 3Q15 as the 2.25 sen/kWh rebate for Mar-Jun 2015 period will reflect a full quarter impact. The rebate would add RM545m as additional operating cost to TENAGA in 3Q15. Should government’s commitment towards a fuel cost pass-through mechanism stays beyond Jun 2015, the strong earnings shown in 1H15 will be an one-off event as future earnings would depend mainly on its operational efficiency as fuel cost will be passed through on a six-month laggard basis.

Fuel cost is still expected to be lower given the still-weak coal price and lesser consumption of expensive LNG as the coal plants are back in action. Although the EC data shows the gas requirement for the first 40 days of Mar-May 2015 period, or 3Q15 based on TENAGA’s YE period (average: c.1,200mmscfd) was higher than 2Q15 (average: 1,060mmscfd), it is still at the lower side which is similar to the low requirement period in 4Q14-1Q15. In addition, the coal-fired Janamanjung Unit 4 1,000MW Power Plant has already commenced on 14 Apr 2015. All these should help to bring down fuel cost further.

Meanwhile, the RM727m fuel cost over-recovery announced by the government in Feb 2015 was based on “10 months actual and two months estimates” for Jan-Dec 2014 while the RM1.5b fuel cost over-recovery guided by management (in yesterday’s briefing), which is subjected to government’s approval is based on 1H15 (Sep 2014-Feb 2015) actual numbers. Judging from this, the actual over-recovery in the last four months of 1H15 could be quite substantial. Thus, another round of tariff rebate post Jun 2015 is highly likely and the quantum could be bigger than the 2.25 sen/kWh rebate.

Change to Forecasts

We keep our estimates unchanged for now.

Rating

Maintain MARKET PERFORM

Valuation

We rollover our valuation base-year to CY16 from CY15. With unchanged targeted PER of 14.3x which is a 5-year average, our new price target is now RM14.32/share from RM13.94/share previously.

Risks to Our Call

If there is no more rebate to end-user post the Mar-Jun 2015 period which will be a price catalyst to TENAGA. Our estimates are 15%-17% lower than the consensus as we assumed there is continuity in tariff rebate to end-user in the 2H of 2015 given the current low fuel cost environment, such as lower coal prices and a lower requirement of LNG.

Source: Kenanga Research - 28 Apr 2015