• Dividends declared for 4-month financial period to Dec17
• 50% payout at higher end of 30%-60% policy
• “Bonus” regulated earnings not sustainable in RP2
• Maintain HOLD at unchanged TP at RM16.30

Released 4mth financial result due to FYE change. Due to a change in year end to from Aug to Dec, Tenaga released a 4-month financial period ended Dec17 result. Tenaga reported earnings of RM2.4b on the back of revenue of RM15.8b (no comparable financial period is available). The result is a 1-month extension to the Nov17 quarter results released last month.

Dividends for short financial period. However, the highlight of yesterday’s announcement is that Tenaga announced a dividend of 21.41sen/share for the 4-month financial period. This represents a 50% payout ratio, consistent with the payout for the previous FY17 (ended Aug) period and is at the higher end of Tenaga’s 30%-60% payout ratio policy.

Enjoyed “bonus” earnings in RP1. Average rates achieved during the 4M-to-Dec17 period was 39.5sen/kwh against RP1’s base rate of 38.53sen/kwh given a more favourable customer mix than RP1 forecast (See Exhibit 3); industrial consumers are charged lower tariffs while commercial and domestic segments are charged higher. As the proportion of higher priced commercial and residential segment volumes were higher than forecast, Tenaga enjoyed “bonus” earnings for the most part of RP1 (CY15-17). The “bonus” earnings explained above is unlikely to sustain into RP2 because the reference price in calculating Tenaga’s revenues for RP2 is adjusted to the actual average tariff achieved at end RP1 which is 39.5sen instead of RP1’s 38.5sen.

Inflated earnings not sustainable. As such, while average allowable returns are higher for RP2 as we had argued previously (by circa 11% on our estimates given a higher asset base), the “bonus” earnings which inflated Tenaga’s profits in RP1 is unlikely to be sustained. Average RP1 allowable return was RM3.4b/annum (7.5% WACC, average asset base: RM46b) but actual regulated earnings achieved is estimated to have been around RM4.4b given the more favourable average rates. Given the absence of the “bonus” earnings in RP2 (partly offset by higher RP2 allowable return of an average RM3.8b, 7.3% WACC, average asset base: 53b), we estimate Tenaga’s regulated earnings to be impacted by RM500-600m/annum or circa 7% per annum.

Source: MIDF Research - 1 Mar 2018