TENAGA posted an impressive FY16 results which were largely due to low fuel costs coupled with demand growth. However, the fast rising coal prices could dent its near-term earnings before the increase is passing through to consumer eventually under the half-yearly tariff review. Thus, tariff rebate is likely to be reduced further in 2017. Nonetheless, we remain positive on TENAGA given that the rising fuel cost will have neutral impact to its earnings under the mechanism. TENAGA remains an OUTPERFORM for its defensive earnings quality with price target maintained at RM17.50/share.

FY16 in line. 4Q16 results within our expectations with full-year FY16 core net profit of RM6.69b coming 2% below our forecast but fell short of consensus estimates by 8%. The core earnings were adjusted for the nonrecurring RM390.0m forex translation loss as well as RM1.07b tax adjustment for reinvestment allowance. Final NDPS of 22.0 sen declared in 4Q16 totalling FY16 NDPS to 32.0 sen, higher than the 29.0 sen paid in FY15.

4Q16 marginally lower as top line declined. Despite lower earnings by 2% sequentially, the core profit of RM1.88b reported in 4Q16 is still commendable. The decline in earnings was largely owing to lower revenue which contracted 7% due to higher ICPT over-recovery of RM856.0m from RM537.6m previously. In addition, local electricity sales also fell 1% as the hot weather subsided. Adjustment for reinvestment allowance was reduced to RM200.0m from RM431.3m previously. Overall opex dipped 2% to RM9.35b as total fuel costs declined 7% to RM4.09m owing to a 7% drop in generation capacity as electricity demand fell. Coal generation mix inched up to 57% from 56% while gas generation mix dropped to 39% from 40%. Average coal price rose 3% to USD54.7/mt or 5% in MYR term to RM221.1/mt. On the other hand, average LNG price fell 18% to RM27.96/mmbtu from RM34.16/mmbtu previously. Average gas volume was flattish at 1,102mmscfd in 4Q16 from 1,103mmscfd.

FY16 boosted by lower fuel costs. On YoY comparison, 4Q16 core profit jumped 21% from RM1.55b in 4Q15, led mainly by lower fuel costs which fell 7% as fuel prices declined. Average coal price fell 12% in USD term or 8% in MYR term while average LNG price dropped 11% beside the average gas volume declined 15%. In addition, total electricity sales rose 2% but revenue fell 4% as the ICPT over-recovery surged to RM856.0m from RM34.0m last year. In FY16, core profit rose leapt 12% to RM6.69b from RM5.98b which was helped by lower fuel costs of 6% and a 3% hike in revenue as electricity demand grew 4%. Average coal price fell 16% to USD55.7/mt from USD66.0/mt or 2% in MYR terms to RM231.1/mt from RM236.0/mt while average LNG price plunged 28% to RM32.76/mmbtu from RM45.21/mmbtu. Average gas volume fell 7% to 1,128mmscfd from 1,213mmscfd which was partly due to the commencement of new coal-fired T4 plant in Mar 2015.

Keep OUTPERFORM. With the rising coal prices of late, upcoming 1Q17 is likely to be weaker but not alarming as the higher fuel cost will be adjusted in the half-year tariff review under the ICPT framework to be passed through to the end-users eventually. Thus, it will be earnings neutral to TENAGA. We keep FY17 estimates and launch our FY18 estimates with a flattish bias as higher opex is expected to offset a 2.1% demand growth. Our price target is maintained at RM17.50/share, based on CY17 14.4x PER (+1.5SD of 2-year moving average) which is not excessive given its sustainable earnings growth and index-linked heavyweight status. It remains our TOP PICK for the sector. Risks to our OUTPERFORM call include: (i) a slowdown in economy growth, which will affect electricity demand, and (ii) a sudden surge in fuel prices resulting in a short-term earnings weakness.

Source: Kenanga Research - 28 Oct 2016