Tenaga Nasional Bhd
(Jan 25, RM13.80)
Maintain buy with a target price of RM19.36: Tenaga Nasional Bhd’s (TNB) first quarter for financial year 2017 (1QFY17) core net profit (CNP) of RM1.97 billion, excluding foreign exchange (forex) gains, is in line with both ours and consensus earnings estimates, both at 26%. 

Despite this, there were two quarterly deviations from our full-year forecasts, as there was an unexpected higher general expenses due to a one-off RM200 million provision, resulting in the earnings before interest, taxes, depreciation and amortisation (Ebitda) margin contracting 1.3% percentage points (ppts) to 33.7% (versus our assumption of 34.2%) and an effective tax rate of 10.4% for the quarter (versus our assumption of 16.1% for FY17).

1QFY17 revenue rose by 5.3% year-on-year (y-o-y) to RM11.24 billion, driven by a 3.6% rise in electricity demand and a flattish -0.1% change in tariff rates to 39.4 sen/kilowatt hour. A superior commercial sales mix of 36.1% in 1QFY17 (versus 34.9% in 1QFY16) contributed to sustained average selling prices. 

Total cost rose by 5% to RM3.97 billion due to higher fuel spend as coal averaged US$63 (RM279) (per tonne versus US$59 per tonne a year ago; 6.8% y-o-y). However, cost was buffeted by a favourable industry generation output mix of 42:54:4 for gas, coal and others, compared to 47:49:4 in 1QFY16 and cheaper liquefied natural gas (LNG) inputs. A one-off RM200 million provision ballooned general expenses as well. 

As a result, Ebitda rose 1.5% to RM3.79 billion as the Ebitda margin contracted to 33.7%. Core net profit excluding forex gains contracted by -3.1% to RM1.97 billion. No dividends were declared as expected. 

Management expects higher but stabilised coal prices in the region of US$78 per tonne (versus US$63 per tonne in 1QFY17). While it remains below the base tariff rate of US$85 per tonne, the resulting cost in ringgit is 30% higher based on our assumptions. 

A mitigating factor includes management’s outlook on LNG prices at RM28/million British thermal units (mmbtu), which is below the base tariff rate of RM41.68/mmbtu. However, regardless of external prices, the cumulative imbalance cost pass-through surplus, coupled with cost savings derived from the renegotiation of cheaper first-generation power purchase agreements of RM1.4 billion, allows for sufficient cover of the current under-recovery rate. It suffices for the remainder of FY17, according to our estimates. 

We like TNB for its improved earnings visibility and exciting merger and acquisition outlook, which is expected to supplement earnings and optimise its capital structure. — AmInvestment Bank, Jan 25