9MFY21 results are on track with expectations with core profit of RM3.89b, partly attributed to higher monsoon-driven hydro revenue in 1HFY21. Meanwhile, with COVID-19 now an endemic, we believe the hit last year is unlikely to repeat this year and also next year. As such, we are still optimistic on its earnings resiliency while the heavy discount on ESG concerns could be overdone. OP maintained at RM11.41 with a decent >4% dividend yield.

3QFY21 in line. At 80%/82% of house/street’s FY21 estimates, 9MFY21 core profit leapt 38% to RM3.89b, which we deem as inline given that the higher revenue generated from hydropower plant due to the monsoon season in 1HFY21 is unlikely to sustain owing to an energy payment cap quota annually for hydropower plant. No dividend was declared during the quarter as expected as it usually pays half- yearly dividend.

A weaker sequential result partly on lower electricity sales... 3QFY21 core profit fell 20% QoQ to RM1.08b, despite revenue rising 4%, partly due to the MCO 3.0 which led a 4.4% decline in electricity sales coupled with a higher sales discount of RM394.6m from RM45.1m previously. However, the higher group revenue was largely due to a big 318% jump in ICPT over-recovery of RM1.31b from RM0.31b as fuel cost rocketed. 3QFY21 total fuel costs surged 23% to RM5.45b from RM4.42b as average coal cost jumped 35% to USD124.1/MT from USD92.0/MT while average gas reference market price grew 13% to RM21.4m/mmbtu from RM18.9/mmbtu previously.

… but still a solid quarter YoY. YoY, 3QFY21 core profit rose 9% from RM986.8m last year, on the back of 17% expansion in revenue, owing to: (i) 37% decline sales discount and (ii) ICPT over-recovery of RM1.31b vs. ICPT under-recovery of RM0.96b on a surge in fuel costs. However, electricity revenue in Peninsular fell 8% as demand contracted 6.7%. YTD, 9MFY21 core profit leapt 38% to RM3.89b from RM2.82b while revenue rose 10% for the same reason above as the COVID-19-led sales discount fell sharply by 81% to RM0.46b from RM2.38b for the same period last year. In general, total fuel costs rose 11% which was mainly led by 59% jump in average coal prices.

On track to meet FY21 forecast and a better FY22. We expect a comparable sequential result in 4QFY21 as the higher hydro revenue in 1HFY21 is not sustainable. On the other hand, with COVID-19 now treated as endemic, new drastic lockdowns are unlikely; thus, we do not expect further COVID-19 impact in FY22. As such, we remain optimistic on its earnings prospects post-COVID pandemic as its earnings resiliency remains solid. Post 3QFY21 results, we keep our FY21 forecast unchanged but cut FY22 estimates slightly by 3% to reflect the one-off prosperity tax.

Attractive valuation; OP maintained. Share price is still lacklustre given the ESG concerns but heavy selling is somewhat abating. It has RE expansion plan and is committed to be coal-free by 2050 to address the ESG issue. Thus, its forward FY22E PER of 10x seems fairly attractive which values the stocks at 1.5SD below its 3-year mean. As such, we continue to rate the stock an OUTPERFORM with revised TP of RM11.41 from RM11.80, which embedded a RM2.05 ESG discount from its mean valuation of RM13.46. It is also supported by a decent dividend yield of >4% with potential special dividend. Downside risk to our recommendation is weaker-than-expected earnings from non-regulated businesses.

Source: Kenanga Research - 26 Nov 2021