• Annual revenue adjustments on quarterly basis going forward, but lumpy adjustment for 4Q18

• Fuel price adjustment could partly offset the impact

• FY19F earnings unchanged, FY18F revised down 11% to reflect retrospective revenue adjustment hit

• Maintain BUY at unchanged FY19F-based TP of RM14.60

Quarterly adjustments in future. After further clarification, we gather that the annual revenue adjustments (ARA) – adjustments for the difference between RP2 revenue requirements vs. actual revenue achieved - will be done on a quarterly basis going forward, while the RM564m adjustment for FY18F variances will be recognised in 4Q18. The adjustment in 4Q18 is large as this will reflect the retrospective adjustments for the prior quarters. Going forward, the recognition should be more even given quarterly provisions. Recognition was delayed for FY18F given that the Government had yet to decide on a mechanism for ARA previously. Cash flow impact is still expected on an annual basis, via ICPT pass-through.

Revenue cap adjustments. To recap, FY18F revenue cap adjustment was determined at RM367m and there were also several other items factored in, including refunds of excess single buyer working capital (See Exhibit 1). All in, adjustments, including revenue and price cap adjustments, amounted to RM564m for the FY18F period.

Fuel price adjustments. Underlying 4Q18 earnings (excluding ARA provisions) should improve as Fuel Price Adjustment (FPA) mechanism (difference between actual coal price and Applied Coal Price (ACP)) will reflect the significant increase in coal price recognised in 3Q18. ACP is adjusted quarterly reflecting the prior quarter’s effective price and hence is constantly lagging. In 3Q18, the FPA stood at RM422m given a sharp increase in coal price.

Earnings revisions. We revise down our FY18F earnings by 11% to reflect the retrospective ARA provisions in 4Q18. Our FY19F earnings are unchanged as we had made the adjustments in an earlier report.

Recommendation. Our FY19F-based DCF-based TP is unchanged at RM14.60/share. Our BUY is maintained following already steep share price correction in the past one month, particularly after Tenaga’s weak 3Q18 and more so, after the announcement of the ARA late last week. Tenaga now trades at just 11.8x FY19F. Dividend yield is decent at 4.2% (based on conservative 50% payout assumption). Key catalysts: (1) Peaking capex cycle suggests room for dividend upside (2) Possible monetisation of backbone fibre asset via partners.

Source: MIDF Research - 19 Dec 2018