• Core 9M18 earnings in-line with ours but behind consensus

• Higher fuel cost impacted earnings

• Capex looks to have peaked, room for higher dividends

• Re-affirm BUY at unchanged TP of RM16.80

Earnings in-line. Tenaga reported 3Q18 core earnings of RM1.2b (excluding RM510m one-offs), which brought 9M18 core earnings to RM5b. This is within our expectation but below consensus accounting for 73% and 69% of our and consensus’ FY18F. Given a change to FYE Dec reporting, no year-on-year comparison was available.

One-off factors. Several one-off factors impacted Tenaga’s reported 3Q18 earnings namely: (1) RM290m additional provision for impairment for GAMA – as we had mentioned last quarter, 2Q18 impairment was based on TRY4.6:USD and since then, the TRY had depreciated further (2) RM220m Collective agreement (CA) for non-executive resulting in exceptionally higher staff cost. On 9M18 basis, one-offs were: (1) GAMA provisions amounted to RM496m – GAMA has already been fully written off in Tenaga’s books, (2) CA clawback at RM220m (3) Exceptional provisions for delinquent accounts at RM170m.

Higher fuel cost. Coal cost recognised by Tenaga surprisingly rose significantly in 3Q18, higher by 13%qoq (at USD94/mt FOB) and more reflective of 6000kcal trends than 5500kcal trends. To recap, there has been a divergence in thermal coal price trends since around July 2018 – 6000kcal rose while 5500kcal dropped, though the divergence has now normalised and 6000kcal has been trending down. The impact of higher coal price is further compounded by weak RM trends (3Q18: RM4.09:USD vs. 2Q18: RM3.95:USD). On top of this, 3Q18 reflected higher piped gas price of RM25.70/mmbtu (vs. RM24.20/mmbtu in 1H18) in line with the gradual subsidy rollback.

Temporarily higher gas mix. Additionally, fuel cost was impacted by higher gas in the generation mix which increased to 42% from 39% last quarter. This is due to outages at Kapar Energy and Tg. Bin coal plants and is temporary. Coal mix is expected to normalise in 4Q18. Coal fuel cost is still cheaper than gas at 18sen/kwh vs. 20sen/kwh (piped gas + LNG). Other than these, 3Q18 operating expense was impacted by higher repair and maintenance cost (+22%qoq) and general expenses (+24%qoq) which typically builds up as the year progresses.

Fuel cost pressure could ease slightly. The higher fuel cost, although technically is temporary until Tenaga gets adjustments in 1H19 ICPT, will impact earnings for FY18 given the delay in recovery. Nonetheless, we expect fuel cost in 4Q18 to ease slightly given a recovery in coal mix and gradually easing coal price in the spot markets.

Source: MIDF Research - 28 Nov 2018