Period

4Q15/FY15

Actual vs. Expectations

FY15 core net profit of RM5.97b beat our estimates by 10% but below market consensus by 9%. The main discrepancy from our forecast was due to us expecting a higher ICPT in 4Q15 whereas the actual amount was only RM34m vs. RM300m in 3Q15.

The core earnings were adjusted for: (i) RM819.3m forex translation loss, and (ii) RM958.8m reinvestment tax allowance.

Dividends

Final NDPS of 19.0 sen was recommended, bringing full-year NDPS to 29.0 sen which is the same as FY14 but lower than our assumption of 32.5 sen.

Key Results Highlights

4Q15 core earnings surged 2.5-fold QoQ to RM1.55b from RM438.1m previously as the 3Q15 was slammed with the full RM1.82b ICPT overrecovery cost for the period of Jan 2014 to May 2015. In fact, 4Q15 ICPT over-recovery cost was very low at RM34m vs. RM300m in 3Q15 due to the higher gas generation mix as the outages of coal fired plant thus higher utilisation of other expensive fuel like gas/LNG and oil/distillate. The full 17- month ICPT cost booked in 3Q15 which was recognised at revenue level, led to higher revenue recorded in 4Q15 by 19% to RM11.74b from RM9.91b.

Operationally, revenue from sales of electricity rose 4% QoQ to RM11.31b from RM10.82b on the back of 4% hike in Peninsular Malaysia as demand grew 3.8%. However, total fuel cost which includes energy payment to IPP, rose 5% to RM4.98b due to: (i) the abovementioned outages of coal plant, and (ii) higher coal price coupled with the sharp decline in MYR vs. USD. The daily average gas volume inched up 1% only to 1,294mmscfd from 1,278mmscfd as in certain period, Petronas’ gas facility also faced outages; thus, TENAGA used more oil/distillate in 4Q15 which saw its oil/distillate fuel costs surging 352% to RM118.4m from RM26.2m. On the other hand, average coal cost in 4Q15 leapt to USD62.4/mt from USD55.0/mt. However, average LNG price fell 14% to RM31.3/mmbtu from RM36.6/mmbtu previously.

For YoY comparison, FY15 core earnings soared 28% to RM5.97b from RM4.68b largely due to the 15% tariff hike in Jan 2014 which resulted revenue for Peninsular sales rising 8% to RM41.22b from RM38.02b. In addition, total fuel cost also declined by 9% to RM17.82b from RM19.69b due to higher coal generation mix of 45.6% from 39.8% in FY14 while the gas/LNG generation mix dropped to 49.4% from 54.5%. Overall, the average coal cost was USD66.0/mt from USD75.4/mt while the daily average gas volume fell to 1,213mmscfd from 1,331 mmscfd with average LNG price dipping to RM45.21/mmbtu from RM46.45/mmbtu.

On debt exposure, total debt increased slightly to RM24.7b (net debt: RM15.8b) as at Aug 2015 from RM24.1b (net debt: RM14.4b) three months ago. On the other hand, the debt exposure to USD denominated borrowings was increased to 7.1% from 6.3% previously. Meanwhile, gearing rose to 34.2% (net: 21.9%) from 33.9% (net: 20.2%) previously.

Outlook

Given that the past two quarterly results have already reflected the adjustment of ICPT at the revenue level, future quarterly revenues will adjust according to their respective quarters. Judging from the current fuel prices, we expect the over-recovery trend to continue into 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 pass-through on a six-month laggard basis. Thus, future earnings will depend mainly on its operational efficiency.

On the other hand, the disposal of 1MDB’s power assets is likely to conclude soon. This overhang issue has bogged down TENAGA for sometime and it will continue to pressure the share price of TENAGA until the disposal is over. Meanwhile, the pressing issue remain the pricing. Should the eventual price tag is between RM8b-RM10b, this should be positive for TENAGA as a re-rating story after being bashed down heavily in the past six months.

Change to Forecasts

We raise FY16-FY17 estimates by <1% for adjustment of FY15 actual results.

Rating

Maintain MARKET PERFORM

Valuation

With the mild earnings adjustment, our new price target is now raised slightly to RM12.90/share from RM12.78/share based on an unchanged 5-year average of 12.8x on CY16 earnings. A rerate by +0.5SD of 5-year mean (15.8x) will derive a fair value of RM15.93/share while the downside is RM9.97/share which is - 0.5SD of 5-year mean (9.9x) should the 1MDB deal turns out to be unfavourable to TENAGA.

Risks to Our Call

A slowdown in economy growth which will affect electricity demand.

Source: Kenanga Research - 30 Oct 2015