TENAGA’s FY22 result disappointed on higher interest cost as its total debt rose. Still, we are unperturbed by a 20% drop in FY22 core net profit which largely caused by soaring fuel costs that will eventually be recovered under the Incentive-Based Regulation (IBR) framework. We cut our FY23F net profit by 9% and tweak our TP down by 2% to RM10.00 (from RM10.17). We also downgrade our call to MARKET PERFORM from OUTPERFORM as the recent run-up in its share price has rendered valuations expensive.

FY22 core net profit of RM3.84b missed our forecast and consensus estimate by 12% and 11%, respectively. The key variance against our forecast came mainly from higher interest cost (actual RM4.34b vs. forecasted RM3.84b) on increased debt (to RM63.88b in FY22 from RM53.28b in FY21) which was mitigated by lower-than-expected taxation (actual RM1.79b vs. forecasted RM2.13b). A final NDPS of 26.0 sen declared in 4QFY22 totalled FY22 NDPS to 46.0 sen (FY21A: 40.0 sen) which is higher than our assumption of 38.0 sen.

YoY. FY22 core profit declined 20% despite a 6% increase in turnover (led by commercial of +16%) due to an 89% surge in fuel cost. Its average coal cost almost doubled to RM935.0/MT from RM481.3/MT while its average gas reference market price (for Tier 2) jumped to RM42.4/mmbtu from RM20.6/mmbtu. As such, its generation cost per unit almost doubled to 31.0 sen/kWh from 17.0 sen/kWh.

QoQ. 4QFY22 core profit plunged 65% to RM472.2m from RM1.33b while revenue was flattish at RM12.92b. Total opex jumped 11% to RM18.10b from RM16.36b, led by fuel costs (+5%) and depreciation (+6%). While average coal cost remained flattish, average gas reference market price for Tier 2 jumped 18% to RM51.2/mmbtu from RM43.3/mmbtu. 4QFY22 generation cost per unit increased further to 33.9 sen/kWh from 31.2 sen/kWh in 3QFY22.

Forecasts. We cut our FY23F net profit by 9% to reflect the higher interest cost and introduce our FY24F numbers which implies a tepid 1% earnings growth. Our FY23-FY24F NDPS forecasts are based on 50% payout.

Going forward, its earnings are resilient as the ballooning under recovery of fuel costs will eventually be recovered under the IBR framework, albeit with a 6-month lag. So far, TENAGA has received RM4.0b ICPT cost recovery claims for Jan 2023 (with balance of RM6.4b to be paid in five equal instalments till Jun 2023) from the government which showed the latter’s commitment to the IBR framework.

We continue to like TENANGA for: (i) its resilient earnings profile which is safeguarded by the ICPT mechanism, (ii) being a proxy to Malaysia’s domestic consumption recovery, and (iii) its heavyweight index-linked stock status. Furthermore, its dividend yield is decent at >4%. Post earnings revision, we cut our TP to RM10.00 (from RM10.17), based on a 5% discount (due to its 2-star ESG rating) to our DCF-derived valuation of RM10.52. Given its recent solid share price performance (+14% in the past three months), we cut the stock to MARKET PERFORM from OUTPERFORM.

Risks to our recommendation include: (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 - 28 Feb 2023