KEY INVESTMENT HIGHLIGHTS

• 3Q19 results in-line with expectations

• Commendable earnings growth despite MFRS16 impact

• In process of cleaning up GMR, to reprioritize capital utilization

• Maintain NEUTRAL at unchanged TP of RM14.40

3Q19 results in-line. Tenaga reported a core net profit of RM1.3b for its 3Q19, bringing 9M19 core earnings to RM4.2b (after normalizing for RM293m exceptional items). This is in-line with estimates accounting for 77% of our estimates and 76% of consensus. No interim dividends were declared for 3QFY19 similar to last year.

Commendable earnings growth. Despite a negative RM203m MFRS16 impact in 3Q19 (which we do not exclude for our core earnings calculation), Tenaga’s 3Q19 core earnings were up 8%yoy driven by improvement in associate contribution, progressively higher RAB (regulated asset base) and higher volumes (+1.1%yoy) (benefits retail which is on price cap basis). Additionally, 3Q18 saw higher coal cost and registered FPA shortfall of RM422m (actual cost paid to supplier is higher than amount billed to generators) vs. an FPA over-recovery of RM312m in 3Q19. Management is looking at ~RM400m MFRS16 impact to P&L for the full year, implying almost half of this will hit 4Q19 P&L.

Cleaning up GMR. GMR (India operations) is in the midst of disposing non-core assets, strengthening its balance sheet and reprioritize capital utilisation. At this juncture, Tenaga has made no decision yet on whether it will remain in GMR or exit in the future. Tenaga had already impaired up to 60% of its investments in GMR.

Sector reform. Tenaga re-iterates that T&D will remain with it under the sector reform. The retail segment will be opened up and Tenaga expects to see more creative revenue generation in this space, particularly on beyond the meter prospects. At this juncture, Tenaga is not yet looking at a separation between T&D and generation (other than the internal reorganization).

Recommendation. We remain NEUTRAL on Tenaga at unchanged TP of RM14.40. At this juncture (and at 13x FY20F PER) we think Tenaga is fairly valued considering increased longer term earnings risk from a change in competitive dynamics for generation from the sector reform.

Source: MIDF Research - 28 Nov 2019