KUALA LUMPUR: CIMB Equities Research has cut its earnings forecasts for Tenaga Nasional Bhd
but it is retaining its Buy call as its cheap valuation has priced in the risks including the imbalance cost pass-through tariff.
It said on Wednesday the power giant’s valuations of 11 times CY17-18F P/E was undemanding.
Tenaga posted earnings of RM1.74bil in the first quarter ended Nov 30, 2016 (Q1FY8, 2017) down 12% from a year earlier as foreign exchange (forex) translation loss almost quadrupled to RM231.2mil.
Commenting the financial results for, CIMB Research said although 1QFY8/17 core net profit made up 25% of its and 26% of Bloomberg consensus full-year forecasts, “we deem it as below expectations”.
“We expect earnings in future quarters to be weaker due to higher operating expenses. 1QFY17 expenses exceeded our expectations because of provisioning.
“Maintain Add, but cut FY17-19F EPS by 3%-6% to reflect higher operating costs. This cuts our target price to RM16.30, still based on 12.5 times CY18 PE, its five-year historical average.
“Earnings boost from overseas assets in late-2017 and 2018 are key potential rerating catalysts. Key risk is the sell-down of Malaysian equities by foreign funds,” it said.
To recap, CIMB Research said excluding forex translation loss of RM231mil, Tenaga’s 1QFY17 core net profit declined 3% on-year to RM1.972bil.
The lower net profit was mainly due to a 15% on-year decline in reinvestment allowance recognised to RM332mil, and a 12% on-year jump in non-fuel expenses to RM3.586bil.
Tenaga also reported a share of loss from associate of RM9.7mil for the quarter (from RM10mil profit in 1QFY16) due to the acquisition of Gama Enerji, which it expects to incur losses in the initial years.
The research house said Tenaga’s non-fuel expenses jumped 12% on-year in 1QFY17. Out of the RM371mil increment in these expenses for the quarter, approximately RM200mil were related to provision of doubtful debts related to the utilities sector.
“Management stated that the provision was a result of ongoing review of the creditworthiness of its receivables but did not provide guidance on the provision amount going forward.
“The persistent weak economic condition could result in more provisions in the future, in our view. As at Aug 2016, Tenaga’s gross delinquent receivables (i.e. past due dates) jumped 118% on-year to RM4.9bil.
“As we expect Malaysia's economic condition to remain weak in the near term, we believe provisions related to bad and doubtful debts could recur in the coming quarters. We cut our FY17-19F EPS by 3-6% to reflect mainly higher provision expenses.
“During Tenaga's results conference call, several participants expressed concern on its ability to raise tariffs in 2H17 to pass through the higher fuel costs to consumers.
“According to Tenaga, current coal price is about US$87/MT, about 40% higher than its average coal cost of US$63/MT in 1QFY17. However, management remains confident that the imbalance cost pass-through mechanism will shield the company’s earnings from fluctuation in fuel prices.
“Tenaga’s earnings could stay neutral from changes in fuel costs via: 1) adjustment of tariffs based on changes in fuel costs, and 2) utilisation of savings from the renegotiation of its first-generation power purchase agreements (PPAs). Tenaga renegotiated three first-generation PPAs in 2013 and that has resulted in RM1.4bil of net savings so far. These savings could be utilised to moderate or offset the tariff adjustment,” said CIMB Research.
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