Tenaga Nasional - 9MFY23 Hit by Negative Fuel Margin

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TENAGA’s 9MFY23 results disappointed on an outsized negative fuel margin which fortunately is subsiding as coal prices are bottoming out. Meanwhile, softening fuel costs are lowering its working capital needed to fund receivables, resulting in interest savings. We cut our FY23-24F net profit forecasts by 12% and 7%, respectively, lower our TP by 4% to RM11.45 (from RM11.90) but maintain our OUTPERFORM call.

TENAGA’s 9MFY23 core profit of RM2.56b came below expectations at 62%/63% of our full-year forecast and the full-year consensus estimate, respectively. The variance against our forecast came largely from higher-than-expected: (i) negative fuel cost (9MFY23 actual of RM767.9m vs. our full-year assumption of RM650m), and (ii) operating costs, i.e., depreciation and general expenses. The negative fuel margin arose as the actual coal price delivered was higher than the applicable price as coal prices (ACP) fell sharply during the period (see Page 3). No dividend was declared as expected as it usually pays halfyearly dividend.

YoY. Its 9MFY23 topline rose 4% on higher electricity sales mainly driven by commercial sector (+7%) and domestic sector (+5%), while its UK units, i.e. UK Wind, Vortex and CEI UK Ltd reported solid revenue growth of 19%, 31% and 128%, respectively. The electricity unit generated only rose by 1%.

Its total fuel cost declined by 19% as coal cost contracted by 24% following the fall in the ACP by 31% YTD to RM630.7/MT. However, its core profit declined by 24% to RM2.56b largely due to a negative fuel margin of RM767.9m (vs. a positive fuel margin of RM916.7m in 9MFY22).

QoQ. Its 3QFY23 revenue and core net profit were both flattish (+1%) as electricity sales in Peninsular Malaysia stagnated. Its total fuel cost fell 5% as the ACP fell 18% sequentially to RM508.9/MT in 3QFY23.

Meanwhile, the Imbalance Cost Pass-through (ICPT) under-recovery declined by 30% QoQ in 3QFY23 to RM1.99b (from RM2.86b) which was 69% off the peak of RM6.40b in 4QFY22 as the ACP declined. As a result, its total receivables (inclusive of ICPT receivables) fell by 8% to RM13.42b from RM14.55b in 2QFY23.

Outlook. We expect its earnings to improve in coming quarters on the back of tapering fuel costs. TENAGA will be able to recoup fuel costs it is entitled under the ICPT mechanism which are higher as compared to the actual fuel costs it incurs due to timing difference.

Forecasts. We cut FY23-24F net profit forecasts by 12% and 7%, respectively, to reflect: (i) higher negative fuel margin assumption of RM870m in FY23 (vs. RM650m previously), and (ii) higher operating costs.

We trim our NDPS forecasts proportionally based on an unchanged payout ratio assumption of 50%. We also reduce our DCF-derived TP by 4% to RM11.45 (WACC: 6.7%; TG: 2%) from RM11.90. There is no adjustment to our TP based on our ESG 3-star rating (see Page 6).

We continue to like TENAGA for: (i) its dominance in power generation, transmission and distribution in Malaysia, (ii) its defensive earnings backed a resilient domestic economy and assets that are largely regulated, and (iii) its heavyweight index-linked stock status. In addition, its dividend yield is decent at 3%-4%. Maintain OUTPERFORM

Risks to our recommendation include: (i) ballooning under-recovery of fuel costs, straining its cash flow, (ii) a global recession hurting demand for electricity, and (iii) non-compliance of ESG standards set by various stakeholders.

Source: Kenanga Research - 27 Nov 2023

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