Tenaga Q1 FY18 core net profit within forecast, says CIMB Research

KUALA LUMPUR: Tenaga Nasional’s 1QFY18 core net profit was within expectations at 29% of CIMB Equities Research and 28% of Bloomberg consensus full-year forecasts due to seasonality. 

The research house said on Monday that 1Q18 core earnings (excluding forex gain) came in at RM2bil while revenue stood at RM12.3bil. 

No comparatives can be made for this period due to the change in the financial year (FYE from August to December in 2017). 

CIMB Research said the 1Q18 share of results of associates recorded a loss of RM84.1mil, mainly due to losses in: (i) GAMA Enerji, Turkey (30% owned) on forex losses from US$ financing due to depreciation of the Turkish Lira vs. US$ and (ii) GMR Energy Ltd, India (30% owned) due to coal and gas cost pass-through and gas supply disputes. 

“We expect the associates to continue to record losses in the near term, before starting to contribute positively in 2020,” it said.

The 1Q18 electricity demand growth was 2.3% year-on-year (vs. -0.8% year-on-year in 1Q17), driven by higher demand in Industrial (+4.4% year-on-year) and Domestic (+2% year-on-year), mitigating the flat growth in Commercial (+0% year-on-year). 

“We maintain our electricity demand growth assumption at 2%, which is in line with the Energy Commission’s Regulatory Period 2 (RP2) assumed load growth of 1.8%-2%,” it said. 

Tenaga’s 1Q18 base tariff was 39.6 sen/kWh, which is higher than the average base tariff of 39.45 sen/kWh under RP2. 

Given that four regulated entities in Tenaga are under a revenue cap, except customer services (price cap), the additional revenue earned from the higher tariff will be recovered or passed on to electricity customers in the next regulatory term. 

“According to Tenaga, the surplus has not been adjusted as the regulation guidelines are still not in place. 

“We maintain Hold on Tenaga, despite the recent share price retracement and being one of the cheapest big-cap stocks in the market given: (i) earnings risks as the stable regulated earnings might not be able to offset the earnings downside from the expected step-up in tax rate due to a reduction in reinvestment allowance and (ii) uncertainty arising from the continuity of the imbalance cost pass through (ICPT) mechanism. 

“The stock is currently trading at 13 times FY19F P/E, which is similar to the peer average of 14 times.   We leave our forecasts unchanged given the in-line results. 

“Our target price stays at RM16.70, still pegged to an FY19F P/E of 14 times, the sector average. The key downside risk to our call is lower-than-expected electricity demand or weaker contribution from associates. The key upside risks are stronger-than-expected earnings from associates and higher electricity sales,” it said.

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