FY21 core profit of RM4.81b came within expectations while FY22 is expected to be another fruitful year as the hit in FY20-FY21 is unlikely to repeat this year and beyond as COVID-19 is now an endemic. We remain optimistic on its earnings resiliency while the heavy discount on ESG concerns could be overdone. OP maintained at RM10.52 with a decent >5% dividend yield.

FY21 result spot on. At 99% of both house and street’s estimates, FY21 core profit of RM4.81b matched expectations. It declared a final NDPS of 18.0 sen in 4QFY21, totalling FY21 NDPS to 40.0 sen, which is lower than 80.0 sen (inclusive of 40.0 sen special dividend) paid in FY20, against our projection of 42.4 sen.

A weak sequential result on higher opex. 4QFY21 core profit fell 15% QoQ to RM916.1m, despite revenue jumping 21%, no thanks to higher opex by 34% especially from depreciation charges which was RM185.3m or 7% higher while staff and repair & maintenance costs also grew by 23% and 26%, respectively. Meanwhile, rising fuel prices also pushed fuel costs higher by 27% which led to 144% jump in ICPT over-recovery of RM3.21b from RM1.31b previously. Average coal cost rose 39% to RM723.7/MT from RM520.5/MT while average gas reference market price leapt 25% to RM26.8/mmbtu.

A better FY21 which recovered from MCO 1.0 lockdown. YoY, 4QFY21 core profit fell 6% from RM976.1m, despite revenue surging 52% from last year, owing to the similar reasons as QoQ on higher depreciation charges and staff costs. The strong revenue was backed by ICPT over-recovery of RM3.21b in 4QFY21 as compared to ICPT under-recovery of RM1.56b in 4QFY20. YTD, FY21 core profit leapt 26% to RM4.81b as there was a total of RM2.75b sales discount due to MCO 1.0 lockdown in FY20 as compared to RM0.54b in FY21. Besides, fuel costs also jumped 60% to RM14.92b in FY21 which led to an ICPT over-recovery of RM4.50b from ICPT under-recovery of RM3.03b previously.

A better FY22 with unchanged of return rate under RP3. Yesterday, TENAGA announced that the government had approved the RP3 which starts from Feb 2022 to Dec 2024 with unchanged regulatory return of 7.3%, the same as RP2. As such, we believe FY22-FY24 earnings prospects would remain high certain with less subsidies. Post 4QFY21 results, we keep our FY22 forecasts unchanged and introduce new FY23 forecast with earnings projected to grow 5.4%.

Attractive valuation; OP maintained. Share price continued to trend lower amidst ESG concern. However, 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 OP with revised TP of RM10.52 from RM11.41, which embedded a RM2.05 ESG discount from its mean valuation of RM12.57 (14x PER) from RM13.46 (15x PER). It is also supported by a decent dividend yield of >5% with potential special dividend.

Downside risk to our recommendation is weaker-than-expected earnings from non-regulated businesses.

Source: Kenanga Research - 25 Feb 2022