TENAGA’s 1HFY23 results met expectations. Its 1HFY23 core net profit grew 16% YoY on higher electricity sales, lower fuel cost and tax. Going into 2H, continued softening fuel cost will further cut its funding needs for receivables, resulting in lower interest expenses. We maintain our forecasts but lift our TP by 5% to RM11.15 (from RM10.64). Maintain OUTPERFORM.

TENAGA’s 1HFY23 core profit of RM2.35b met expectations at 49% and 50% of our full-year forecast and the full-year consensus estimate, respectively. The core earnings were adjusted for two major items: (i) RM425.4m forex translation gains, and (ii) RM565.7m negative fuel margin. The negative fuel margin arose as the actual coal price delivered was higher than the applicable price as coal prices (ACP) fell sharply during the period (see Page 3). It declared 1st interim NDPS of 18.0 sen in 2QFY23 which is lower than the 20.0 sen paid in the same period last year.

YoY. Its FY23 revenue grew 4% to RM25.9b on higher electricity sales mainly from commercial sector (+7%) and domestic sector (+4%), while the UK units - Vortex and CEI UK Ltd also reported commendable growth of 28% and 168%, respectively. Meanwhile, despite higher electricity unit generated by 1%, total fuel costs contracted 12% as average ACP declined 18% to RM697.4/MT. Meanwhile, its core profit rose 16% to RM2.35b, partly attributable to a lower taxation by 64% due to lower tax expense in 1HFY23 on higher reinvestment allowance while there was a one-off prosperity tax impact in 1HFY22.

QoQ. Its 2QFY23 turnover rose 6% to RM13.3b given the solid electricity sales by 10% in Peninsular Malaysia which was also led by commercial (+7%) and domestic segments (+17%). On the other hand, its core profit leapt 30% to RM1.33b due to lower depreciation charges (-4%) coupled with a 4% decline in total fuel costs.

Meanwhile, the Imbalance Cost Pass-through (ICPT) under-recovery declined 21% QoQ in 2QFY23 to RM2.86b from RM3.63b in 1QFY23 and 55% off the peak of RM6.40b in 4QFY22. As a result, total receivables (inclusive of ICPT receivables) fell 26% to RM14.55b in 2QFY23 from RM19.66b in 1QFY23.

Outlook. 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 against fuel cost entitled under the ICPT mechanism due to timing difference.

Forecasts. Maintained.

We raise our DCF-derived TP by 5% to RM11.15 (from RM10.64) as we roll forward our valuation base year to FY24F (from FY23F) based on an unchanged WACC of 6.7% and TG of 2%. Our TP reflects a 5% discount given a 2-star ESG rating as appraised by us (see Page 5). 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. Its dividend yield is decent at c.4%. Maintain 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 Aug 2023