Period

2Q16/1H16

Actual vs. Expectations

Although 1H16 core profit of RM3.09b constitute 51% of our FY16 estimates, we deem the results as beating our estimates as we are expecting a better 2H16 on higher electricity demand. The main discrepancy from our forecast was due to our lower demand growth and tariff rate assumptions. However, the results were within market consensus at 44% of full-year estimates.

The core earnings were adjusted for: (i) RM235.4m forex translation loss, and (ii) RM440.1m reinvestment tax allowance.

Dividends

A 10.0 sen NDPS was declared in 2Q16 which is the same as 2Q15.

Key Results Highlights

2Q16 core profit fell 12% QoQ to RM1.45b from RM1.64b previously, attributable to: (i) lower revenue by 2% or RM187.5m on seasonality, (ii) higher opex by 5% or RM409.7m, and (iii) lower reinvestment allowance of RM47.3m vs. RM392.8m in 1Q16. Although electricity demand fell 0.5% QoQ, led by 1.4% decline in industrial sector on holiday season closure coupled with the shortened month in February, we saw a strong QoQ surge of 12.0% for domestic segment due to the current hot weather, as compared to 2.1% QoQ growth in 2Q15. In addition, the commercial segment also posted 6.1% demand growth in 2Q16. In all, this resulted in the sales in Peninsular Malaysia falling slightly by 1%.

Operationally, total fuel cost which includes energy payment to IPPs, dropped 3% QoQ to RM4.12b from RM4.23b due to the fall in average coal prices to USD56.2/mt or RM237.4/mt from USD59.0/mt or RM254.1/mt while the daily average gas volume dipped 4% to 1,133mmscfd from 1,175mmscfd. However, average LNG price rose 8% to RM35.84/mmbtu from RM33.07/mmbtu. Nonetheless, the reported ICPT over-recovery cost increased slightly to RM713.1m from RM681.8m previously (continued overleaf).

Change to Forecasts

We raise FY16/FY17 estimates by 12.0%/12.5% on higher demand growth assumption of 3.4% from 2.1% in FY16 but maintained 2.1% in FY17 while a higher tariff rate assumption by 1.4% on average for both FY16/FY17. Other key assumptions to remain unchanged.

Rating

Maintain OUTPERFORM

Valuation

We are rolling over our valuation base-year to CY17 from CY16 with a slightly lower targeted PER of 14.4x from 15.3x previously, both based on +1.5SD of 2-year moving average. Thus, the new price target is now raised to RM17.50/share from RM16.49/share previously.

Risks to Our Call

A slowdown in economy growth which will affect electricity demand.

Source: Kenanga Research - 28 Apr 2016