FY19 results were satisfactory with a flattish core profit of RM5.45b which is not unexpected given the IBR ensuring earnings stability. But, a special NDPS of 50.0 sen was a pleasant surprise, together with 20.0 sen regular NDPS implying yield of 5.8%. Going forth, falling fuel costs could result in a lower generation costs in coming 1QFY20. In our view, the recent weakness in price is a buying opportunity for its stable earnings as governed by the IBR framework. Keep the stock at OP with revised TP of RM14.20.

4QFY19 within expectations. At 95%/98% of house/street’s estimates, FY19 core profit of RM5.45b came within expectations. The core earnings were adjusted partly for RM250m one-off general expenses and RM300m for forced outages at KEV and TBNJ. Meanwhile, it declared a surprise special NDPS of 50.0 sen and a regular final NDPS of 20 sen, totalling full-year FY19 NDPS to 100.0 sen which is higher than 53.3 sen paid in FY18 and our FY19 NDPS assumption of 50.7 sen.

Lower revenue and higher opex thumped earnings lower. 4QFY19 core earnings declined 29% sequentially to RM964.8m which were due to lower revenue by 4% or RM464.7m and higher non-fuel opex by 20% or RM759.2m. The lower revenue was partly attributable to 1.6% decline in electricity sales in peninsular while the higher opex was led by 42% hike in repair & maintenance, 16% rise in depreciation and 64% jump in general expenses. Meanwhile, total fuel costs fell 8% or RM612.7m to RM6.97b due to the decline in average coal price by 14% to RM291.9/MT, 11% in average LNG price to RM31.67/mmbtu, and 5% in average daily gas volume to 1,011mmscfd. On the other hand, share of associate income turned to losses at RM59.2m from profit of RM29.7m which was partly due to reversal of deferred tax at GMR as a result of change in tax law in India.

A flattish FY19 earning. Despite revenue falling 3%, 4QFY19 core earnings rose 18% from RM816.1m largely due to lower total opex by 4% or RM508.7m as total fuel costs fell 4% on lower fuel prices while non-fuel opex also fell 4%. The 3% dip in revenue was primarily due to ICPT rebate of RM80.8m from ICPT surcharge of RM970.7m in 4QFY18 given the fall in fuel prices. In fact, revenue in peninsular grew 2% thanks to a 1% rise in electricity sales. YTD, FY19 core profit was flattish at RM5.45b from RM5.47b in FY18 with revenue inching up 1%.

Lower fuel costs will pass through in 1HFY20. In early Dec, the former Energy Minister already announced a lower ICPT surcharge by 0.55 sen/kWh to 2.00 sen/kWh in 1HCY20. Given the continued down trending fuel prices in the last two months, we may expect lower fuel cost in the coming 1QFY20. Should this trend continue till year-end, we may see a lower base-tariff in RP3 which will start next Jan. Postresults, we trim FY20 earnings estimates by 4% on fine-tuning to align with FY19 actual results. We also introduced FY21 new forecast where we assume the return rate for RP3 to be the same as RP2 at 7.3%, and a demand growth projection of 1.8%. Our NDPS for both FY20-FY21 are assumed based on 50% payout.

Keep OUTPERFORM, as stock is priced at an unwarranted PER of 12.3x which is lower than 1.5SD below its 3-year mean of 14.5x at 12.6x. In view of earnings certainty and its heavyweight index-linked stock status, it should at least be valued at par with its mean. As such, we reiterate our OUTPERFORM call at a revised target price of RM14.20 from RM14.30 which is based on unchanged 3-year mean.

Risks to our recommendation are: (i) weaker-than-expected earnings from non-regulated business, and (ii) a slow in economy, on the back of Covid-19 outbreak and the political uncertainty slowing down demand growth

Source: Kenanga Research - 2 Mar 2020