TENAGA’s 1HFY22 results missed our forecast but met market expectations. We under-estimated the impact of the prosperity tax and timing difference between the actual fuel costs incurred vs. the fuel costs entitled under the Imbalance Cost Pass-Through (ICPT) mechanism. We are not perturbed by the seemingly ballooning under-recovery of fuel costs as it will eventually be recovered under the Incentive-Based Regulatory (IBR) framework. We cut our FY22F and FY23F net profits by 9% and 3%, respectively, lower our TP marginally to RM10.17 (WACC: 7.1%, TG: 2%) from RM10.27. Maintain OUTPERFORM.

1HFY22 core profit of RM2.04b made up 43% of our FY22F forecast and 46% of FY22F consensus estimate. We consider the results below our expectation but in line with the market’s. The variance against our forecast came largely from our under estimation of the impact of the prosperity tax and timing difference between the actual fuel costs incurred vs. the fuel costs entitled under the ICPT mechanism. It declared a first interim NDPS of 20.0 sen in 2QFY22 vs. 22.0 sen paid in 2QFY21.

1HFY22 core profit fell 28% YoY to RM2.04b from RM2.82b in 1HFY21 despite revenue soaring 45% to RM34.80b (due to RM6.30b ICPT under-recovery in 2QFY22 or RM9.81b in 1HFY22 vs. RM22.7m ICPT over-recovery in 1HFY22). This was partly due to a one-off Cukai Makmur of RM257.3m in 1HFY22 while the lag-effect of higher fuel costs (reported 135% or RM10.95b jump in total fuel costs vs. total ICPT under recovery of RM9.81b in 1HFY22). Average coal costs surged 141% YoY to RM847.3/MT in 1HFY22 against reference coal price of RM325.72/MT in RP3.

On demand-side, Peninsular’s electricity sales jumped 5.7% in 1HFY22 (vs. guided 1.7% growth) on the back of 13.9% and 2.7% hike in commercial and industrial segments, respectively. As such, due to higher actual sales which led to RM151.2m to be returned via revenue adjustment mechanism in 1HFY22 while higher actual ASP vs. base tariff also led to a RM132.4m price cap adjustment to be returned. Meanwhile, total receivables jumped 36% QoQ to RM19.17b (63% related to ICPT) as at Jun 2022 from RM14.07b as at Mar 2022. However, under the Regulatory Implementation Guidelines, TENAGA is allowed to recover the cost of working capital through the ICPT Remuneration Rate. This means TENAGA is allowed to claim any costs involved in financing this ballooning ICPT-related receivables.

Forecasts. Cut FY22F/FY23F earnings by 9%/3% to adjust for: (i) higher Cukai Makmur of RM500m in FY22 from RM250m (against company’s guidance of RM250m), (ii) higher fuel cost by RM200m for both FY22 and FY23 given the elevated fuel costs which delay the lag effect of ICPT adjustment into FY23. Accordingly, FY22/FY23 NDPS forecast are adjusted proportionally based on unchanged 50% earnings payout.

While 1HFY22 results came below expectation, we remain optimistic on TENAGA given that Cukai Makmur is one-off in FY22 while skyrocketing fuel costs is pass through with lag-effect which is mainly accounting treatment in the immediate term. Post earnings revision, we trimmed DCF-driven fair value slightly by 1% to RM10.70 from RM10.81 (based on unchanged WACC: 7.1% and TG: 2%). However, there is a 5% discount adjustment to our TP based on ESG given a 2-star rating as appraised by us (see Page 5). As such, our TP is reduced to RM10.17 from RM10.27. Maintain OUTPERFORM. The stock is also supported by a decent dividend yield of >4%.

Risk to our recommendation: (i) ballooning under-recovery of fuel costs, straining its cash flow, (ii) a global recession hurting demand for electricity, and (iii) non-compliance of ESG standards set by various stakeholders.

Source: Kenanga Research - 1 Sept 2022