• 1Q19 within, but at higher end of expectations

• GAMA financial guarantee now fully impaired, less than half of GMR carrying value in the books

• Revision to FY19F/20F to reflect MFRS16 but these are noncash, no impact to valuation

• Re-affirm BUY at unchanged TP of RM14.40

1Q19 within expectations. Tenaga’s 1Q19 was largely within our and consensus expectations. Tenaga reported 1Q19 core net profit of RM1.59b, accounting for 27% of our FY19F and 29% of consensus. Reported earnings (and our core earnings) are lower year-on-year given that Tenaga only started to reflect the annual revenue adjustment (ARA) on a quarterly basis from 1Q19, whereas in FY18, ARA was only recognised in the final quarter. Secondly, Tenaga’s reinvestment allowance (RA) has fully expired hence, higher effective tax rates in 1Q19 and for the full year (the higher tax rate is already reflected in analyst forecasts generally).

Exceptionals in 1Q19. Tenaga’s 1Q19 involved several one-off charges totalling a net RM293m comprising: (1) Impairment of financial guarantee for GAMA of RM136m – this has now been fully impaired (2) Impairment of GMR of RM198m (3) One-off adjustment on RP1 capex efficiency carryover scheme (ECS) of RM51m – reflects savings on financing from underspent capex in RP1 (4) One-off adjustment on RP1 opex ECS of RM129m (5) Reversal of LTIP provision of RM221m – the Board has decided not to disburse this as Tenaga failed to achieve its net profit target last year. These items have been normalised to derive our core net profit estimate of RM1.59b for 1Q19.

Lower losses at associates. Following heavy impairments taken last year, Tenaga has fully impaired its carrying value in GAMA hence the lower losses from associates & JVs in 1Q19 of just RM6m vs. RM77m in 1Q18. GMR was impaired in 1Q19 and there is a balance 40% remaining carrying value in Tenaga’s books. Financial guarantees given to GAMA have also now been fully impaired.

All in or nothing? Management is exploring whether the overseas investments can be developed into strategic assets that can be used as platform for growth rather than mere investments. Tenaga sees overseas investments as a long-term growth potential for the group (to get to its target of becoming the top 10 utility company in the world) and will keep to its overseas expansion strategy if the right viable opportunity arises. It is also looking at the possibility of improvising the business models of the overseas units, though this could be challenging with the current minority stakes in the ventures.

Source: MIDF Research - 29 May 2019