• Core FY18 earnings in-line with expectations

• Generous 56% dividend payout, expect lower FY19F capex

• Earnings tuned down slightly to factor in higher staff cost

• Re-affirm BUY at slightly lower TP of RM14.40

Earnings in-line. Tenaga reported 4Q18 core net profit of RM896m, bringing FY18 core earnings to RM5887m. This is in-line, accounting for 97% of both our and consensus estimates. A final dividend of 23sen was declared bringing full year dividends to 53.27sen, in-line with our 53.7sen forecast. At 56% payout ratio, this is at the higher end of the 30%-60% payout policy.

One-off factors. Our core earnings calculation excludes several one-off factors: (1) RM496m GAMA provisions – mostly done in 9M18 (2) Collective agreement clawback RM220m – as indicated in previous quarter (3) RM170m exceptional provision for delinquent accounts – as indicated in previous quarter (4) RM270m impairment of financial guarantee for GAMA (5) RM305m impairment for GMR (6) RM310m SESB tariff and fuel subsidy (7) Forex translation loss of RM393m. GAMA has now been fully provided for.

Slight change to annual revenue adjustment. The actual annual revenue adjustment (ARA) booked in the 4Q18 was higher at RM639.8m versus the previous estimate of RM564m. The RM76m variance came from underestimation of 4Q18 demand volume. We did not adjust for this as the additional adjustment came with higher revenues. Management indicated that FY18 RM5.4b normalised net profit (based on management’s version of normalised earnings, which reverses the overseas provisions, SESB fuel & tariff subsidy and forex translation losses) should be the baseline numbers going forward, (as opposed to previous indications of circa RM6b previously). Going forward, the ARA will be adjusted on quarterly basis instead of just a one-shot hit in the 4Q. The ARA was only adjusted in 4Q18 last year as the regulatory guidelines was only finalised towards year end.

Coal mix recovered. On fuel cost, coal generation mix recovered to 57.5% - 3Q18 mix was low at 54% due to outages at Kapar Energy and Tg. Bin coal plants. Given that Jimah East (2000MW, COD: Jun/Dec 2019) will kick in progressively this year, we expect coal mix and consumption to increase in tandem this year.

Earnings revisions. Though the core earnings were in-line, we make some housekeeping adjustments to our forecasts – we adjust lower our FY19F by 3% to factor in higher staff cost going forward as an implication of the CA adjustment in FY18. Other than this, underlying forecasts remain intact.

Source: MIDF Research - 1 Mar 2019