Review

• Tenaga Nasional Berhad (TENAGA)’s 1HFY23 core net profit of RM1.8bn (-13.4% YoY) came in below expectations at 40% of ours and 38% of consensus’ full-year forecasts. The shortfall was largely attributed to higher-than-expected losses in the domestic generation business due to negative fuel margins.

• The board approved a first interim dividend of 18sen/share (2QFY22: 20sen/share).

• 1HFY23/YoY: Revenue advanced 3.8% YoY driven by higher electricity sales from demand growth (+2.0% YoY). Despite lower tax provision (1HFY23 effective tax rate decreased 13.8%-pts YoY due to absence of oneoff prosperity tax), net profit plunged 24.6% YoY on the back of: i) higher finance costs (+9.5% YoY) from increased borrowing to fund higher fuel costs; ii) negative fuel margins (1HFY23: negative fuel margin of RM565.7mn vs 1HFY22: positive fuel margin of RM257.0mn); and iii) foreign exchange losses (+98.9% YoY) mainly from outstanding USD loans.

• QoQ: 2QFY23 revenue increased 5.5% QoQ driven by electricity demand which jumped 7.0% QoQ. Nonetheless, foreign exchange losses of RM391.7mn compared with gain of RM26.6mn in 1QFY23 coupled with higher tax expense (+57.5% QoQ) due to foreign exchange losses not deductible for tax dragged the net profit by 67.3% QoQ.

• 2QFY23 electricity demand grew 3.3% YoY and 7.0% QoQ on the back of commercial (+7.2% both YoY and QoQ) and domestic demand (+9.0% YoY and 17.2% QoQ). Meanwhile, ICPT under recovery plunged 21.3% QoQ in 2QFY23 as coal prices continued to decline (2QFY23: RM623.2/MT, 1QFY23: RM779.4/MT). Note that TENAGA’s total debt has declined 5.3% QoQ as the group slowly reduces its debt following the full recovery of 1HFY23 ICPT surcharge amounting to RM10.4bn from the government and the decline in coal prices (less working capital needs).

Impact

• We slash our FY23/FY24/FY25 earnings forecasts by 19.2%/2.0%/0.8% respectively to factor in the lacklustre 2QFY23 results.

Outlook

• Following the softening and stabilisation of fuel costs, TENAGA’s ICPT receivables is expected to continuously decline in coming quarters. We expect the group to register lower finance cost as it gradually improves its gearing ratio driven by improvement in the group’s operating cash flow.

• We view TENAGA as the key beneficiary of National Energy Transition Roadmap. We understand that the grid upgrade for energy transition will be under a different scheme from the current regulated incentive-based regulation (IBR) scheme. Furthermore, there will be multi-tier pricing to domestic and foreign firms for the sales of renewable energy. These provide exciting earnings growth opportunities to TENAGA as we expect the return to be higher than IBR scheme considering the more lucrative price for renewable energy in Singapore.

Valuation

• Following our earnings forecasts adjustment, we lower our TP to RM11.00/share based on DCF valuation (k: 7.2%, g: 1.4%). Maintain Buy.

Source: TA Research - 28 Aug 2023