The 1Q12/17 results were satisfactory although higher fuel costs crimped profitability. However, the ICPT framework will address this issue with pass-through to end-consumer eventually. In our opinion, an outright surcharge is likely to happen after GE14 should ICPT under-recovery persist. It remains an OUTPERFORM for its earnings quality and heavy index-weighted status with unchanged target price of RM17.17/share.

1Q12/17 matched expectation. TENAGA reported 1Q12/17 core profit of RM1.47b which met our expectations as the earnings made up 73% of our FY12/17 (4-month period) estimates of RM2.00b. There is no consensus for this short financial period for Sep-Dec 2017. It is expected to release the 4-month period results by end-Feb after which it shall revert to new 12-month financial period for Jan-Dec 2018. There was no dividend declared during this period but we expect 14.2 sen NDPS to declare for FY12/17 next year.

Sequential results hit by high coal price. 1Q12/17 core profit contracted 15% QoQ to RM1.47b from RM1.72b in 4Q08/12, which was largely due to higher fuel costs by 5% or RM208.9m as average coal price rose 16% to USD86.8/mt or 14% in MYR term to RM365.4/mt. Thus, total coal costs jumped 17% or RM384.4m to RM2.66b. However, gas/LNG cost fell 6% to RM1.93b as gas volume requirement fell 8% to 890mmscfd from 968mmscfd previously. Meanwhile, share of profit of associate turned to losses at RM67.1m, from a profit of RM68.4m previously, largely due to losses at GMR on higher fuel costs. Taxation declined sharply to RM63.5m from RM417.9m due to reversal of deferred taxation of RM157.8m owing to lower accrued revenue. Overall, group revenue fell 7% to RM11.61b as revenue for Peninsular Malaysia dipped 1% as demand growth fell 0.4% while the ICPT turned to over-recovery of RM196.7m from underrecovery of RM61.8m previously.

Higher fuel costs for yearly results too. Despite higher revenue by 3% due to higher demand growth and lower ICPT over-recovery to RM196.7m from RM604.8m, 1Q12/18 core profit declined 10% YoY from RM1.64b in 1Q08/17. The decline in earnings was mainly due to higher fuel costs by 16% as coal costs surged 43% on a 38% jump in average coal price in both USD term and MYR terms from USD63.0/mt and RM264.7/mt in 1Q08/17, respectively. However, gas/LNG costs fell 6% as gas volume requirement fell 18% from 1,079mmscfd. Meanwhile, higher share of loss of associate income and lower taxation charges were due the same reasons mentioned above.

Better earnings ahead in FY18; keep OP. We believe focus is now on FY18 following the higher base tariff of 39.45 sen/kWh in RP2. Thus, we believe earnings should be higher given a higher asset base despite lower asset returns of 7.3%, as well as demand growth. And, we also believe that TENAGA will be allowed to surcharge customer should fuel costs are higher post GE14. We continue to like TENAGA for its earnings quality profile as well as its heavy index-weighted status. It remains an OUTPERFORM with unchanged target price of RM17.17 based on CY18 14.4x PER which is based on +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 - 29 Jan 2018