Review

• Tenaga Nasional Bhd’s (TENAGA) FY23 core net profit of RM3.1bn came in below expectations, accounting for 87% of ours and 88% of consensus’ full-year forecasts. The earnings miss was mainly attributed to higher-thanexpected operating expenses, specifically the non-generation costs.

• The board approved a final interim dividend of 28sen (4QFY22: 26sen), bringing the YTD DPS to 46sen (FY22: 46 sen).

• QoQ: 4QFY23 core profit plunged 47.6% QoQ due to higher operating expenses, particularly TENAGA’s general expenses (+69.0% QoQ). Despite recording positive fuel margin of RM149.2mn in 4QFY23, the power generation segment still registered loss after tax of RM198.9mn, negatively impacted by capacity rate financial (CRF) stepdown of some power plants since 3QFY22.

• YoY: Excluding impact of foreign exchange translations, 4QFY23 core profit dropped 17.2% YoY on the back of higher repair and maintenance costs (+26.3% YoY) and lower tax expense in 4QFY22 from higher capital allowance and reinvestment allowance claim.

• YTD: FY23 core profit dipped 21.9% YoY, mainly driven by (i) higher repair and maintenance costs (+21.2% YoY); (ii) higher subsidiary’s general expenses (+17.1% YoY); and (iii) negative fuel margins amounting to RM618.7mn as well as CRF stepdown of plants. Notably, domestic power generation business registered loss after tax of RM526.8mn in FY23 compared with profit after tax of RM860.5mn in FY22 (aided by positive fuel margin of RM1.1bn).

Impact

• No change to our earnings forecasts prior to more granularity from analyst briefing this Friday.

Outlook

• In January this year, TENAGA has received RM780mn of ICPT cost recovery for October 2023 from the government. The continuous recovery of ICPT has helped to reduce the group’s ICPT receivables from RM16.9bn as at FY22 to RM7.3bn as at 3QFY23, hence improving its cash flow position. The ICPT receivable is expected to continue trending lower as coal prices remain lower than in 2022 and government moves towards subsidy rationalisation.

• TENAGA is the prime beneficiary of National Energy Transition Roadmap (NETR) as the group will benefit from incremental revenue via wheeling charges of cross border electricity exports. The NETR currently still lacks the finishing touch of finalising the mechanism of exchange hub to enable the export of renewable energy. We expect more clarity on the policy by the end of this year in line with the finalisation of RP4 parameters.

Valuation

• We roll forward our valuation base year and increase our terminal growth rate for TENAGA to 1.6% (previously 1.4%) as we are more confident in TENAGA’s long-term growth in view of the NETR. Reiterate Buy with a higher TP of RM12.50/share (previous: RM11.00/share) based on DCF valuation (k: 7.2%, g: 1.6%).

Source: TA Research - 28 Feb 2024