TENAGA’s 1QFY23 results met expectations. It guided for a 26% QoQ decline in Imbalance Cost Pass-Through (ICPT) receivables to RM10.2b in 2QFY23 which will eventually be recovered under the Incentive Based Regulation (IBR) framework, with an estimated RM9b in 2HFY23. We keep our forecasts, TP of RM10.64 and OUTPERFORM call.

1QFY23 core profit of RM1.02b met expectations, making up 21% each of both our full-year forecast and the full-year consensus estimate. No dividend was declared as expected as it pays half-yearly dividend.

YoY. 1QFY23 revenue rose 4% on higher units sold and sales of electricity mainly from commercial sector (+6%). Its core profit jumped 13% mainly attributable to higher revenue coupled with lower taxation by 74% or RM489m which was due to: (i) higher reinvestment allowance, and (ii) the one-off Prosperity Tax impact in 1QFY22. Meanwhile, total fuel costs grew 8% as average coal cost jumped 12% to RM779.5/MT while average gas reference market price for Tier 2 surged 68% to RM62.1/mmbtu. As such, its generation cost per unit increased to 27.2 sen/kWh from 24.8 sen/kWh last year.

QoQ. 1QFY23 top line dipped by 2% due to lower units sold and sales of electricity from industrial (-3%) and commercial sectors (-1%). However, core profit more than doubled as total fuel costs contracted 21% led mainly by the fall in coal costs by 24% but gas price leapt 21%. With the lower fuel costs, its generation cost per unit fell to 27.2 sen/kWh from 33.9 sen/kWh in 4QFY22.

Forecasts. Maintained.

We expect its earnings to improve further in the coming quarters on the back of tapering fuel costs which would contribute to a lower actual fuel costs incurred vs. fuel cost entitled under the ICPT mechanism due to timing difference.

TENAGA guided for a lower ICPT receivable of RM10.2b by 2QFY23 from RM13.8b in 1QFY23 and a peak at RM16.9b in 4QFY22. As such, TENAGA forecasted RM9.0b ICPT cost recovery to be recovered in 2HFY23. So far, TENAGA has received RM5.3b ICPT cost recovery claims out of RM10.4b cost recovery for the period of 1HFY23 from the government. The balance will be fully recovered by Jun 2023. This shows the government’s commitment to the IBR framework.

We continue to like TENAGA for: (i) its dominant position in power generation, transmission and distribution in Malaysia, (ii) its defensive earnings backed a resilient domestic economy and assets that are largely regulated, and (iii) its heavyweight index-linked stock status. In addition, its dividend yield is decent at >4%. Maintain OP with unchanged DCF-derived TP of RM10.64 (WACC: 6.7%; TG: 2%), based on a 5% discount (due to its 2-star ESG rating) to our DCF derived valuation of RM11.20.

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 - 30 May 2023