Period

3Q15/9M15

Actual vs. Expectations

Headline 3Q15 net profit of RM789.4m looks fairly weak compared to the 1H15 net profit of RM4.51b, largely due to the recognition of RM1.82b ICPT over-recovery for the period of Jan 2014 to May 2015. This raise 9M15 net profit to RM5.30b against our full-year FY15 estimate of RM5.46b and RM6.49m that of market consensus.

Adjusting for: (i) RM85.8m forex translation loses, and (ii) RM951.6m reinvestment allowance, 9M15 core net profit would have been RM4.43b which made up 81%/68% of house/street’s full-year estimates. We deem this to be within our estimate.

Dividends

No dividend was declared in 3Q15, which was expected, as compared to a 10.0 sen NDPS paid in 2Q15.

Key Results Highlights

3Q15 core earnings plunged 74% QoQ to RM438.1m from RM1.69b previously, largely attributable to the abovementioned RM1.82b ICPT over-recovery cost or RM1.36b after tax which was recognised at the revenue level. In fact, the revenue from sales of electricity rose 2% on the back of a 3% hike in revenue from the Peninsular Malaysia as demand grew 1.3%. In addition, total fuel cost which includes energy payment to IPP, surged 25% or RM937.2m mainly due to higher generation mix for gas-fired plants as few coal-fired plants (both TENAGA and IPPs) were out due to outages, as well as lower generation mix from hydro plants.

The improved electricity demand in the Peninsular was expected due to the post-CNY holiday effect. This lifted the total electricity sales in West Malaysia by 3% to RM10.28b. The generation mix for gasfired plants surged to 51.1% from 45.9% as coalfired plants were reduced to 42.5% from 47.0% while hydro plants normalised to 3.5% from 7.0%, which was driven by the flood in Dec 2014. As such, the average daily gas requirement surged to 1,278mmscfd from 1,060mmscfd. However, both coal and LNG fuel fell substantially by 17% and 21%, respectively, to USD55/mt and RM36.6/mmbtu.

For YoY comparison, 9M15 core earnings grew 19% to RM4.43b, attributable to 11% surge in electricity sales partly due to a 15% tariff hike in Jan 2014. Meanwhile, 12% or RM1.67b saving in fuel costs was recorded for the period. In fact, average coal price fell 12% to USD67.3/mt from USD76.5/mt while average daily gas volume contracted 13% to 1,186mmscfd from 1,370mmscfd previously. The drop in gas volume was driven by the lower generation mix from gas-fired plants to 48.8% from 56.1% while coal generation mix rose to 46.1% from 37.8% previously.

On debt exposure, total debt was reduced to RM24.1b (net debt: RM14.4b) as at May 2015 from RM25.6b (net debt: RM21.6b) three months ago, due to the settlement of USD350m bond. As such, the debt exposure to USD denominated borrowings was reduced to 6.3% from 11.3% previously. Meanwhile, gearing eased to 33.9% (net: 20.2%) from 35.3% (net: 29.8%) previously.

Outlook

As the 17-month RM1.82b ICPT over-recovery has already been reflected in 3Q15 topline, future quarterly revenues will adjust according to their respective quarters. Judging from the current fuel prices, we expect the over-recovery trend to continue in the near term. In addition, with a few coal-fired plants back from their outages in 3Q15 coupled with the Janamanjung Unit 4 Plant already commenced on 14 April 2015, coal generation mix should likely increase in the future, which should help to bring down fuel cost further. We remain positive on the ICPT mechanism, which ensure earnings certainty as the fuel cost risk is fully passthrough on a six-month laggard basis. Thus, future earnings will depend mainly on its operational efficiency.

On the other hand, due to market fears of TENAGA overpaying for the 1MDB’s brownfield power assets, its share price will continue to come under pressure as long as the 1MDB saga remains unsettled.

Change to Forecasts

We keep our estimates unchanged for now.

Rating

Maintain MARKET PERFORM

Valuation

Our price target is maintained at RM12.78/share for now, which is based on a 5-year average of 12.8x on CY16 earnings.

In the near-term, we believe the share price of TENAGA is not likely to be fundamentally driven given the on-going 1MDB issue. Based on CY16 earnings, a +0.5 SD of 5-year mean (15.8x) derive a fair value of RM15.78/share while a -0.5 SD of 5-year mean (9.9x) places the downside risk at RM9.88/share.

Risks to Our Call

A slowdown in economy growth which will affect electricity demand.

Source: Kenanga Research - 31 Jul 2015