Period

1Q16

Actual vs. Expectations

1Q16 results came in above expectations with core net profit of RM1.65b making up 29%/27% of our/street’s estimates. The main discrepancy from our forecast was due to us having higher fuel costs assumption.

The core earnings were adjusted for: (i) RM58.5m forex translation loss, and (ii) RM388m reinvestment tax allowance.

Dividends

No dividend was declared as expected.

Key Results Highlights

1Q16 core earnings rose 6% QoQ to RM1.65b from RM1.55b previously, attributable to lower operating expenses mainly arising from lower fuel costs, despite revenue sliding 9% to RM10.68b from RM11.74b on higher ICPT cost of RM681.8m from RM34.0m in 4Q15. The increase in ICPT overrecovery cost was also a reflection of higher fuel cost saving as fuel prices fell. Meanwhile, the decline in revenue was also partly due to lower electricity demand, which contracted slightly by 0.4%.

Operationally, revenue from sales of electricity fell slightly by 1% QoQ to RM11.18b from RM11.31b as sales in Peninsular Malaysia dipped 1% as demand softened as mentioned above. On the other hand, total fuel cost which includes energy payment to IPP, contracted 15% or RM755.3m to RM4.23b due to: (i) lower consumption of market priced LNG as daily average gas/LNG volume dropped 9% to 1,175mmscfd from 1,294mmscfd, as a few coal plants slowly returned to the system since 3Q15, which were previously shut down on outages, and (ii) lower coal average price by 5% to USD59/mt from USD62.4/mt previously. We also saw lower repair & maintenance cost by 46% or RM324.5m and depreciation by 11% or RM172.9m (to be continued overleaf).

Change to Forecasts

We raise FY16/FY17 estimates by 8%/5% on: (i) higher coal generation mix of 55.0% from 49.8%, (ii) lower gas generation mix of 40.8% from 46.0%, (iii) higher subsidised gas price of RM17.95/mmbtu and RM20.95/mmbtu from RM15.20/mmbtu flat, (iv) lower LNG price of RM35/mmbtu from RM41.68/mmbtu, and (v) lower coal price of USD65/mt from USD70.mt.

Rating

Maintain OUTPERFORM

Valuation

With the upgrade in earnings, our new price target is now raised to RM16.49/share from RM15.42/share, which is based on unchanged 15.3x PER CY16, a +1.5SD of 2-year average of 12.5x.

Risks to Our Call

A slowdown in economy growth which will affect electricity demand.

Key Results Highlights

For YoY comparison, 1Q16 core profit declined 14% from RM1.91b as there was no ICPT adjustment in 1Q15 as the ICPT treatment was started in 3Q15. This brought down the revenue by 3% although electricity sales revenue grew 4% YoY which was led by a 3.2% demand growth in Peninsular Malaysia. Meanwhile, the operating expenses were flattish as the fall in coal price to USD59.0/mt from USD70.2/mt was offset by the sharp decline in MYR term. The average daily gas/LNG volume slid 4% from 1,218mmscfd while LNG price plunged 29% from RM46.8/mmbtu.

On debt exposure, total debt dropped slightly to RM23.9b (net debt: RM15.7b) as at Nov 2015 from RM24.7b (net debt: RM15.8b) three months ago. On the other hand, the debt exposure to USD denominated borrowings was increased to 7.3% from 7.1%. Meanwhile, gearing rose to 32.6% (net: 21.4%) from 34.2% (net: 21.9%) previously.

Outlook

Operationally, we expect the over-recovery trend to continue into the near-term judging from the current fuel prices. In addition, with a few coal-fired plants back in action from their outages in 3Q15 with the Janamanjung Unit 4 Plant already commenced in Apr 2015, coupled with MALAKOFF’s (OP; TP: RM2.19) Tanjung Bin Unit 4 or T4 kick starting in Mar 2016, coal generation mix should 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.

Meanwhile, the RM2.06b reinvestment allowance dispute with Inland Revenue is currently under the legal preceding pending court hearing dates. In our view, it will be a one-off event even if it loses the appeal, thus have immaterial impact to its earnings prospects.

Source: Kenanga Research - 29 Jan 2016