3Q17 results were hit by taxation, which was adjusted for under-provision for prior years’ tax. But, at operation level, earnings were boosted by the undisclosed compensation from the vendor related to the Tanjung Bin dispute which we await details from an upcoming conference call later. Meanwhile, the actual impact on SEV’s capacity payment cut resulted in lower earnings by RM106m in 3Q17. It remains OUTPERFORM at revised price target of RM1.25.

3Q17 below expectation. At 72%/74% of house/street’s FY17 estimates, 9M17 core profit of RM246.2m missed our expectation but matched market consensus. The discrepancy between actual result and our estimates is due to taxation, which was higher than expected as the effective tax rate in 9M17 was 41% vs. our assumption of 30% for FY17. This was due to under-provision of prior years’ tax of RM65m in light of recent development in the interpretation of taxation regulations. No dividend was declared in 3Q17 as expected. It normally pays dividends on half-yearly basis.

Earnings hit by high taxation. 3Q17 earnings declined 23% QoQ to RM64.2m despite a 5% hike in revenue, owing to the abovementioned taxation which resulted in effective tax rate surging to 59% in 3Q17 from 24% previously. However, at PBT level, earnings improved 39% to RM212.9m largely due to the one-off undisclosed compensation from boiler maker IHI Corp Japan for the Tanjung Bin dispute earlier on power plant’s faulty, but this was partially offset by expected lower capacity from SEV (declined RM106m) on downward revision of the PPA Extension from July.

Dispute compensation boosted YoY numbers. 3Q17 and 9M17 core earnings rose 25% and 17% to RM64.2m and RM246.2m, respectively. This was largely led by the undisclosed compensation mentioned above while the lower capacity payment from SEV capped earnings upside. On the other hand, the higher 9M17 results were also attributed to: (i) higher associate incomes as KEV and AA were being rectified, which turned the two problematic associates profitable as well as (ii) higher capacity payment by RM71.6m at TBE as the power plant became operational in end-1Q16.

The going remains tough. We expect taxation to normalise in 4Q17 after the adjustment in 3Q17 while the actual impact of capacity payment cut at SEV was a decline of RM106m in 3Q17. For now, we trimmed FY17-FY18 estimates by 12%/11% on higher effective tax rate assumption to 41% from 30% for FY17 while we adjusted SEV’s earnings to reflect the latest 3Q17 following the capacity payment cut.

Keep OUTPERFORM. The selling pressure on share price is still not abating despite having fallen 27% YTD to the new low of RM0.995. Based on the latest 3Q17’s capacity payment for SEV, we believe that the sell-down is overdone. The stock is trading at 59% discount to its SoP valuation of RM1.58/share which appears attractive as the adjustment on SEV only affect SoP valuation by 3.0 sen. Thus, we maintain our OUTPERFORM rating with a lower target price of RM1.25/share which is at a 20% discount to its SoP valuation. Risks to our call include bigger-than-expected cut in SEV’s capacity payment, unplanned outages and higher O&M costs.

Source: Kenanga Research - 22 Nov 2017