Period

2Q15/1H15

Actual vs. Expectations

At 42%/44% of our/consensus’ full-year estimates, the 1H15 net profit of RM190.2m came below expectations due to higher-than-expected share of loss of associated income from its 40%-owned Kapar Energy Venture Plant (KEV).

Dividends

No dividend was declared during the quarter.

Key Results Highlights

The 2Q15 net profit contracted 17% QoQ to RM86.3m from RM103.9m, mainly due to: (i) share of associated income turning to a loss of RM26.3m from profit of RM10.1m on higher losses at KEV as mentioned above which was due to operational issue, (ii) lower revenue by 4% to RM1.30b partly on lower dispatch by Tanjung Bin Plant, which was shut down for scheduled outages. We estimated that the share of loss at KEV was c.RM40m in 2Q15. Meanwhile, 2Q15 interest expense dipped 6% following the full redemption of RM1.8b Junior Sukuk Musharakah from the IPO proceeds.

YoY, 2Q15 net profit declined 27% from RM118.1m while revenue dropped 12% over the year, mainly due to the same reasons as mentioned above. This was despite a lower revenue base in 2Q14 as the completion of acquiring the remainder of 75% stake in PD Power in Apr 2014 and RM59m fair valuation gain on PD Power. YTD, 1H15 net profit leapt RM58m to RM190.2m despite revenue dipping 2%. This was driven by higher Tanjung Bin earnings and the full impact of 100% PD Power earnings in 1H15 while 1H14 accounted for only half of the 25% associate income as PD Power only became 100%- owned by Apr 2014.

Outlook

The operational issue at the 40%-owned associate KEV is unlikely to be resolved in the near-term; this could be an earning dampener judging from 2Q15 results.

FY15 earnings are expected to be normalised as the Tanjong Bin Plant is now back in order despite some hiccups at KEV. In addition, the T4 which will come on stream by Mar 2016 will be the new earnings kicker.

Change to Forecasts

Given the expected prolonged operational issue at KEV, we expect the share of loss from this associate company to increase to RM60m-RM40m for FY15EFY16E from RM20m previously, while no change in share of profit of RM20m in FY17.

With adjustment only in KEV while other assumptions remain unchanged, we trim FY15- FY17 estimates by 6.8%, 2.5% and 0.1%, respectively.

Rating

Maintain OUTPERFORM

Valuation

Following the earnings adjustment, our new price target is now slightly lowered to RM2.21/share from RM2.22/share which is still at a 10% holding company discount to its SoP. The change in price target is mainly cash-flow adjustment.

Risks to Our Call

Unexpected plant outages and prolonged losses at KEV.

Source: Kenanga Research - 24 Aug 2015