TENAGA’s FY23 results disappointed, weighed down by high fuel costs (recoverable). Its FY23 core net profit declined by 20% due to high-cost coal inventory. We cut our FY24F net profit forecast by 7% to reflect the loss of payment to Manjung 4 plant following an unplanned outage and trim our TP to RM11.40 (from RM11.45). Its valuations have become rich after the recent run-up in its share price. Cut to MARKET PERFORM from OUTPERFORM.

TENAGA’s FY23 core profit of RM3.07b missed our forecast and the consensus estimate by 15% and 12%, respectively. The variance against our forecast came largely weaker-than-expected 4QFY23 results (-34% QoQ) due to high fuel costs (+6% QoQ) (which will be recoverable under the Imbalance Cost Pass-Through or ICPT mechanism). It declared a final NDPS of 28.0 sen in 4QFY23, totalling FY23 NDPS to 46.0 sen (FY22A: 46.0 sen) which is higher than our assumption of 31.7 sen.

YoY. Its FY23 revenue rose 4% on higher electricity sales mainly driven by commercial sector (+8%) and domestic sector (+7%), while its UK units, i.e. UK Wind, Vortex and CEI UK Ltd reported solid revenue growth of 44% in combined. However, its FY23 core profit contracted 20% to RM3.07b largely due to a negative fuel margin of RM618.7m on high-cost coal inventory as opposed to a positive fuel margin of RM1.11b in FY22. On the generation costs, total fuel costs declined 22% as coal fuel costs contracted 30% on the back of 35% decline in average coal prices.

QoQ. While 4QFY23 revenue was flattish (+1%), core profit plunged 34% as total fuel cost rose 6% as it fired more gas (unit generated +9%; gas fuel costs +17%). It used less coal (unit generated -5%) but higher applicable coal price (ACP, +4%) pushed coal fuel costs up by 2%.

Meanwhile, the ICPT under-recovery increased 6% QoQ in 4QFY23 to RM2.11b (from RM1.99b) which was still 67% off the peak of RM6.40b in 4QFY22 as the ACP declined. As a result, its total receivables (inclusive of ICPT receivables) fell by 22% to RM10.42b from RM13.42b in 3QFY23.

Outlook. Its Manjung 4 Plant has been on forced outage since Dec 2023 due to steam turbine high vibration, and repair works are expected to be completed this year-end. The company guided a loss of RM400m capacity payment in FY24 and it is pursuing some cost recovery via insurance claims. Meanwhile, with stabilising coal prices, the huge negative fuel margin (RM618.7 in FY23A) is unlikely to recur.

Forecasts. We cut our FY24F net profit forecast by 7% largely to reflect the loss of RM400m capacity payment from Manjung 4. We also introduce our FY25F net profit forecast with earnings to grow at 8% on the back of 1.8% electricity demand growth. Our FY24-FY25 NDPS forecasts are based on unchanged payout ratio of 50%.

Valuations. We trim our DCF-derived TP slightly to RM11.40 from RM11.45 as we: (i) roll over valuation base year to FY25 from FY24, (ii) reflect the earnings downgrade; but (iii) keep our WACC and TG unchanged at 6.7% and 2%, respectively. There is no adjustment to our TP based on our ESG 3-star rating (see Page 6).

Investment case. We continue to like TENAGA for: (i) its dominance 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 3%-4%. However, its share valuations have become rich after the recent run-up in its share price. Cut 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 2024