1QFY22 core profit of RM904.0m missed forecast partly due to higher-than-expected prosperity tax estimated at RM300m. We are still optimistic on its earnings resiliency with COVID-19 now an endemic, any discount assistance is unlikely to repeat the 2020 scenario. On the other hand, we believe the heavy discount on ESG concerns could be overdone. We continue to rate the stock an OP for its earnings resiliency with a decent >4% dividend yield.

1QFY22 hit by Cukai Makmur with core profit of RM904.0m only making up 18% each of house/street’s FY22 full-year forecast. This was attributable to higher-than-expected of taxation with effective tax rate of 46%, vs. our assumption of 24%, owing to the one-off Cukai Makmur for FY22 which we estimate at c.RM300m against our previous assumption of RM150m. No dividend was declared during the quarter as expected.

A flattish sequential result. 1QFY22 core profit dipped slightly by 1% to RM904.m from RM916.0m in the preceding quarter while revenue was barely changed at RM15.66b. Sales for Peninsular fell 2% as electricity demand dipped 1.4% over the quarter while ICPT over- recovery continued to rise by 9% to RM3.51b from RM3.21b as fuel cost stayed elevated with fuel costs inching up 1% to RM7.92b. Average coal cost fell slightly by 4% to RM696.3/MT while average gas reference market price jumped 25% to RM33.5/mmbtu.

YoY results hit by fuel cost. On a YoY comparison, 1QFY22 core profit plummeted by 39% from RM1.47b despite revenue jumping 36% to RM15.66b which was largely driven by ICPT over-recovery of RM3.51b from a ICPT under-recovery of RM337.3m given the rising fuel costs. The decline in earnings were primarily due to high fuel cost with total fuel cost doubling to RM7.92b from RM3.67b as both coal price and gas reference market price also doubled. Meanwhile, the 4% electricity demand growth also led to higher revenue.

Expecting another weak FY22 as the one-off prosperity tax crimped profitability. Having said that, high fuel cost will have neutral impact on its earnings with 6-month lag effect. As such, its earnings resiliency remains solid. Post 1QFY22 results, we cut FY22E earnings by 7% to factor in additional RM150m of prosperity tax but keep FY23 estimates unchanged.

OP raised to RM11.06. Post earnings revision, however we raised our TP to RM11.06 from RM10.52 as we rolled over valuation base year to FY23 with unchanged mean valuation of 14x PER and embedded with ESG discount of RM2.14 from RM2.05 previously. Its forward FY23E PER of below 10x seems fairly attractive. Thus, we maintain our OP rating on the stocks which is also supported by a decent dividend yield of >4%. Downside risk to our recommendation is weaker-than- expected earnings from non-regulated businesses.

Source: Kenanga Research - 31 May 2022