Tenaga’s  1QFY15  (Aug)  results  beat  our  forecast  and  consensus estimates.  Mainain  BUY, with  a  higher  TP  of MYR18.60  (28%  upside). We raise our FY15-17 net profit forecasts by 20% each to factor in lower gas consumption and a lower tax rate.  Tenaga, a heavy fuel user,  has emerged a clear winner from the current oil price rout. We also like its “renaissance” in power generation.

A blowout 1QFY15.  Tenaga Nasional  Berhad’s (Tenaga)  1QFY15 core net profit beat expectations, coming in at 40%/38% of our/consensus fullyear forecasts respectively. The key variances against our forecast came from lower gas consumption and a lower effective tax rate.  

“Under-recovery”  of  fuel  costs  turns  into  “over-recovery”.  In  the revised Budget 2015 announced  on 20 Jan 2015, the Government said that  “the  scheduled  electricity  tariff  hike  planned  for  2015  will  be postponed”.  As  such,  Tenaga  effectively  will  still  have  to  stomach substantial  fuel  cost  risks.  Nonetheless,  the  current  low  energy  price environment is surely a respite.  In fact, in 1QFY15, there was an “overrecovery”  of  fuel  costs  by  Tenaga  amounting  to  about  MYR200m (compared  with  an  “under-recovery”  of  about  MYR600m  for  full-year FY14).  This  was  because  in  1QFY15,  while  Tenaga’s  actual unsubsidised  gas  cost  exceeded  the  base  price,  this  was  more  than offset by its actual coal cost that came in way below the base price.

Forecasts.  We  raise  our  FY15-17  net profit  forecasts  by  20%  each  to factor in lower gas consumption and a lower tax rate of 15% (from  24%). 

Risks.  i) volatility in gas and coal prices, ii) volatility in MYR’s strength against the USD, and iii) regulatory risks.

Maintain BUY. Tenaga, a heavy fuel user, has emerged a clear winner from the current oil price rout. It is also regaining lost ground in the more lucrative  power  generation  business  vis -à-vis  transmission  and distribution, having emerged as the biggest winner of new power plant projects  in  Malaysia  in  recent  years.  We  raise  our  TP  by  20%  to MYR18.60 (from MYR15.50) based on 15.4x  revised FY15F EPS, at an unchanged  10%  premium  over  Tenaga’s  5-year  historical  average  of 14x,  to  reflect  an  improved  regulatory  risk  envir onment  with  the introduction  of  the  Fuel  Cost  Pass-Through  (FCPT)  mechanism  in  the new energy policy effective 1 Jan 2014.

The Giant Has Awakened 
A  blowout  1QFY15.  Tenaga’s  1QFY15  core  net  profit  of  MYR2.3bn  (excluding MYR56m  forex  gains)  beat  expectations,  coming  in  at  40%/38%  of  our/consensus full-year  forecasts  respectively.  The  key  variances  against  our  forecast  came  from lower  gas  consumption  and  a  lower  effective  tax  rate  of  10.3%  thanks  to reinvestment allowance.

Tenaga’s 1QFY15 revenue grew by 15.2% YoY, backed by: i) a 3.3% growth in unitsales, and ii)  the  impact from an average 14.9% hike in electricit y tariffs (from 1 Jan 2014). In terms of topline growth by segment, commercial led the pack with 20.6%, followed by 19.4% and 15.4% registered by industrial and domestic respectively.Tenaga  was in a sweet spot in 1QFY15. While its topline grew at a double-digit rate YoY  (in  the  mid-teens),  its  operating  expenses  were  very  well-contained  (growing only  at  a  low  single-digit)  against  a  backdrop  of  a  low  energy  cost  environment. Coupled with a low effective tax rate of only 10.3% thanks to reinvestment allowance, its core net profit surged by a whopping 54.1%.

Operating  expenses  only  rose  3.6%  YoY  as  key  operating  expense  items,  ie  fuel costs  (27%  of  total  operating  expenses)  and  payments  to  independent  power producers  (IPPs)  (37%  of  total  operating  expenses)  only  increased  by  2.3%  and 4.1% respectively. The flattish fuel costs were due to: i) lower usage of costlier gas (as  two  coal-fired  plants,  ie  Jimah  and  Tanjung  Bin,  which  had  been  hit  by unscheduled outages, were back online), and ii) lower gas and coal costs. In 1QFY15, industry’s gas and coal costs rose by 11% and 6.3% to MYR2.5bn and MYR1.3bn respectively. In terms of industry generation output, 49.2% was gas-based (from 53.8% in 1QFY14) and 46.3% was coal-based (from 39.8% in 1QFY14). “Under-recovery” of fuel costs  turns  into “over-recovery”.  In the revised Budget 2015 announced on 20 Jan 2015, the Government said that “the scheduled electricity tariff hike planned for 2015 will be postponed”. This means the half -yearly adjustment in electricity tariff in accordance with the  FCPT  mechanism as stipulated in the new energy  policy  effective  1 Jan 2014,  will  not  take effect  this  year.  As current low energy price environment is surely a respite.

In fact, in 1QFY15, there was an “over-recovery” of fuel costs by Tenaga amounting to about MYR200m (compared with an “under-recovery” of about MYR600m for fullyear  FY14).  There  was  no  issue  with  the  subsidised  portion  of  Tenaga’s  gas requirement, which refers to the first 1,000 million standard cu ft  per day (mmscfd) supplied  to  Tenaga  by  Petronas  at  a  fixed  price  of  MYR15.20  per  million  British thermal  unit  (mmBtu).  The  wild  card  came  from  the  unsubsidised  portion  which  is basically  the  remaining  200-400  mmscfd.  On  average,  it  cost  TenagaMYR48.77/mmBtu and MYR46.04/mmBtu in Jul-Sp and Oct-Dec 2014 respectively, which exceeded the base price of MYR41.68/mmBtu. However, this was more than offset by an average coal cost  of USD70.20/tonne in 1QFY15,  which came in way below the base price of USD87.50/tonne.

Forecasts. We raise our FY15-17 net profit forecasts by 20% each to factor in lower gas consumption and a lower tax rate of 15% (from 24%) (which is conservative  vsmanagement’s guidance for “in the low-teens”). We keep our unsubsidised gas cost assumptions  at  MYR46/mmBtu  in  FY15  and  MYR47/mmBtu  in  FY16-17,  and  coal cost  assumptions  at  USD75/tonne  in  FY15  and  USD80/tonne  in  FY16-17.  We continue not to reflect any future tariff hikes in our forecasts.

Risks. These include: i) volatility in gas and coal prices, ii) volatility in MYR’s strength against the USD, and iii) regulatory risks.

Maintain  BUY.  Tenaga,  a  heavy  fuel  user,  has  emerged  a  clear  winner  from  the current  oil  price  rout.  For  every  USD5/tonne  change  in  our  average  coal  cost assumption  of  USD75/tonne,  our  FY15  net  profit  forecast  could  deviate  by  4.2%. Similarly,  for  every  MYR1/mmBtu  change  in  our  average  unsubsidised  gas  cost assumption of MYR46/mmBtu, our FY15 net profit forecast could vary by 1.6% (see Figure 1 for our sensitivity analysis on coal and gas costs).

Also,  Tenaga  is  regaining  lost  ground  in  the  more  lucrative  power  generation business  vis-à-vis  transmission  and  distribution,  having  emerged  as  the  biggest winner of new power plant projects in Malaysia in recent years (see Figure 2). We  raise  our  TP  by  20%  to  MYR18.60  (from  MYR15.50)  based  on  15.4x  revised FY15F EPS, at an unchanged 10% premium over Tenaga’s 5-year historical average of 14x,  to reflect an improved regulatory risk environment with the introduction of the FCPT  mechanism  in  the  new  energy  policy  effective  1  Jan  2014 .  While  the implementation  may  face  hurdles,  we  believe  this  is  certainly  a  step  in  the  right direction towards an eventual tariff deregulation in Malaysia.

Source: RHB