Results continued to disappoint in 9M18, owing to unplanned outages in TBE due to yet another boiler-related issue. As such, we see some potential operational uncertainties at the moment, with another outage planned in 1H19 to further rectify the boiler. Post-results, we trimmed FY18-19E earnings by 13-4%, and lowered TP to RM1.00, from RM1.05. Still OUTPERFORM call, supported by decent dividend yields of 4-5%.

Below expectations. 9M18 core net profit of RM134m, arrived after stripping off gain on disposal of RM55m, came in below expectations at 66% of our, and 57% of consensus, full-year forecast. This was due to unplanned outages in Tanjung Bin Energy Power Plant (TBE) caused by the unexpected boiler wall tube leak. No dividends were announced, as expected.

Poorer results overall. 9M18 core net profit halved 50%YoY, mainly dragged by lower capacity income (-75%) from SEV Power Plant given the reduction of tariff under the PPA extension, coupled with lower associates’ contribution (-44%) on widening losses in Kapar Power Plant and deteriorated earnings from Shuaibah due to higher taxes.

For the individual quarter of 3Q18, core net profit of RM28.5m plunged 56% YoY, similarly due to lower capacity income from SEV and poorer associates’ contribution. Sequentially, core profit deteriorated 46%, QoQ, caused by higher administrative expenses (+34%), and slightly higher finance costs (+5%).

Operational uncertainties in TBE. We see some possible operational uncertainties in TBE at the moment. The recent outage in TBE was mainly attributed by technical problems in its boiler, similar to the previous major outage back in 4Q17-1Q18, although they were caused by different parts of the boiler. In fact, we gathered that TBE is expected to undergo another period of major outage in 1H19, with duration of roughly 60 days, for further rectification works in the boiler and turbine fan blade. However, this would be classified as a “planned outage”, and hence, is expected not to have a significant impact towards its capacity payments schedule. Elsewhere, MALAKOF’s acquisition of Alam Flora is on track, after obtaining shareholders’ approval in early October, with expected completion of acquisition by 1Q19. We remain cautiously optimistic on the deal as it would serve as an added stream of cash flows towards the group.

Maintain OUTPERFORM. Post-results, we trimmed our FY18-19E earnings by 13-5% after lowering our capacity payments assumption for TBE. Resultantly, our SoP-TP was also lowered to RM1.00, from RM1.05 previously. However, it is still an OUTPERFORM following the heavy sell-down in recent months; with our call backed by decent dividend yields of >4-5% based on a management-guided dividend pay-out of 100% on reported earnings.

Risk to our call include: (i) unplanned outages, (ii) higher-than-expected operating costs, (iii) poorer-than-expected earnings contribution from JVs and associates, and (iv) lower-than-guided dividends.

Source: Kenanga Research - 26 Nov 2018