9M17 matched expectation. At 71%/59% of house/street’s FY17 full- year estimates, 9M17 core earnings of RM4.43b came within our expectation as we expect a stronger 4Q17 given the latest tariff review for 2H of 2017 in June with the government absorbing higher fuel costs of RM1.30b incurred in 1H of 2017. The higher consensus estimates could be due to recognition of certain exceptional items. Meanwhile, there was no dividend declared in 3Q17, which was expected as TENAGA usually pays half-yearly dividend in the past.

Stronger sequential results. 3Q17 core earnings rose 20% QoQ to RM1.52b from RM1.27b in 2Q17, which was largely due to higher top- line growth of 12%. However, there were flattish sales of electricity in 3Q17 while the growth in revenue was led primarily by RM507.1m ICPT under-recovery from RM191.1m over-recovery in 2Q17. In fact, overall operating costs were higher with total opex rising 7% as total fuel costs grew 9% as well as financing costs continued to rise higher by another 25%. Average coal price fell 3% in USD term to USD75.4/mt and 6% in MYR term to RM327.9/mt while LNG price rose by 11% to RM30.05/mmbtu. Associates’ income turned to losses of RM11.4m from share of profit of RM19.1m previously mainly due to losses at its Turkish associate company. Taxation also surged by 87% due to increase in deferred taxation expense after recognising the capitalisation of asset for FY16 and FY17 in 3Q17.

Yearly results hit by rising fuel costs and higher taxation. Lower electricity sales by 4% as sales normalised from the extreme hot weather last year, as well as an 18% hike in fuel costs dragged 3Q17 core earnings lower by 20% YoY from RM1.92b in 3Q17. In fact, coal fuel costs surged 55% YoY as average coal cost soared 55% in MYR term to RM312.3/mt while total piped gas costs rose 7% on the back of the scheduled half-yearly gas price hike. However, LNG cost fell as average LNG price declined 12% coupled with lower requirement of average daily gas volume by 5%. Meanwhile, the bottomline also hit by higher taxation for the reason mentioned above. YTD, 9M17 core earnings fell 12% to RM4.43b from RM5.01b previously, although revenue rose 5%, for the same reasons as mentioned above.

Expecting a stronger 4Q17; OP reiterated. We are keeping our estimates unchanged as 4Q17 is anticipated to be a strong quarter as the expected ICPT under-recovery will boost its top-line thus flow through its bottom-line as well. However, the question remains if fuel costs are rising higher which will nett off the PPA savings fund of RM500m currently, will the government allows TENAGA to raise tariff rates in the future. Nonetheless, in the principle of ICPT framework, fuel cost risk is passed through to end consumer, thus with neutral impact to TENAGA’s earnings. We remain bullish on TENAGA given its unwarranted low valuations despite its index-linked heavyweight status and earnings quality profile. It remains as our TOP PICK with OUTPERFORM rating and unchanged price target of RM17.17/share based on 14.4x CY18 PER, in line with its +1.5SD of 2-year moving average. 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 Jul 2017