• Solid growth in 4Q17

• Dividends doubled, payout ceiling raised to 60%

• Strong industrial demand underpins Tenaga as a cheap large cap proxy to stronger macro backdrop

• Re-affirm BUY at unchanged TP of RM16.80/share, Tenaga is an index laggard delivering solid dividends and growth

Results met expectations. Tenaga’s FY17 earnings came in within both our and consensus estimates. Tenaga reported 4Q17 core earnings of RM2b (excluding ~RM300m in provisions and write-offs), which brought FY17 core earnings to RM7.7b accounting for 104% and 102% of forecasts respectively. 4Q17 operating profit was up 12%yoy on the back of higher demand growth (+2%yoy) and ICPT recovery in the period. Core net profit grew by a slower 7%yoy due to higher effective tax rate of 16% vs. 7% in 4Q16.

Positive dividend surprise. Tenaga declared a final dividend of 44sen/share, bringing total FY17 dividends to 61sen/share. This (50% earnings payout) is at the high end of current dividend policy of 30%- 50% and is double FY16’s dividend of 32sen/share. Implied 4.3% yield is attractive for a large cap, index proxy. Underpins our thesis on dividend expansion on the back of an underleveraged balance sheet. Tenaga also announced a further upward revision to the ceiling payout ratio to 60% (from the current 50%) going forward. As n illustration, at the new ceiling payout of 60%, implied FY18F yields could rise to a very attractive 5%. Our dividend payout assumptions are revised up to 55% (from 45%), implying 4.6%-4.9% yields over FY18F/19F.

Are the dividends sustainable? Management indicated that FY17’s 50% payout was a decision made based on the current regulatory environment which promotes stability in Tenaga’s earnings and is likely to be sustainable. Furthermore, generation capex have peaked in FY17 with most major projects completed; Manjung 5 delivered in Sep17. Jimah East is the remaining large project to be completed over the next 2 years (scheduled for completion in FY18 in 2 phases). RM5b out of the total RM12b capex for Jimah East was already spent in FY17. T&D capex however is part of the regulated asset base under RP2 negotiations and is still being finalised.

Source: MIDF Research - 27 Oct 2017