TNB’s results garner mixed views, stronger 4Q17 expected
The higher consensus estimates could be due to recognition of certain exceptional items. Kenanga Research
KUALA LUMPUR: Tenaga Nasional Bhd’s (TNB) first nine months of 2017 (9M17) results have garnered mixed views but some analysts expect a stronger fourth quarter of 2017 (4Q17).
In a filing on Bursa Malaysia, TNB reported that profit attributable to the owners of the company for the current period ended May 31, 2017 was RM5.185 billion as compared to RM5.605 billion recorded in the last corresponding period, a decrease of RM420.6 million or 7.5 per cent.
According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), at 71 per cent and 59 per cent of house and street’s financial year 2017 (FY17) full-year estimates, 9M17 core earnings of RM4.43 billion came within expectations.
Kenanga Research had expected a stronger 4Q17 given the latest tariff review for 2H of 2017 (2H17) in June with the government absorbing higher fuel costs of RM1.3 billion incurred in 1H17.
“The higher consensus estimates could be due to recognition of certain exceptional items,” it said.
On the other hand, TNB’s 9MFY17 core profit of RM5.104 billion came in below AmInvestment Bank Bhd’s (AmInvestment Bank) expectations at only 70 per cent and 68 per cent of the research firm’s full-year forecast and the full-year consensus estimates respectively.
The deviations from AmInvestment Bank’s forecasts included a one-off deferred taxation expense amounting to RM300 million due to higher capitalisation of assets during FY16-17 being recognised in the quarter.
It consisted four per cent of the research firm’s FY17F earnings.
AmInvestment Bank noted an- other deviation was that for the quarter, subsidiary operating cost spiked 80 per cent year on year (yo-y) or RM188 million.
The research firm gathered it may be related to TNB’s repair and maintenance subsidiary seeing a front loading of cost.
Meanwhile, there was no dividend declared in 3Q17, which was expected by Kenanga Research as TNB usually pays half-yearly dividend in the past. AmInvestment Bank highlighted that for 3QFY17, recoverability of higher generation cost more than offset electricity sales which contracted 4.1 per cent.
“It was primarily attributed to domestic unit demand sales plunging 10.4 per cent and marginally lower average tariff rates,” the research firm said. “El Nino boosted electricity demand in 3QFY16.”
Going forward, the research firm expected demand sales to normalise amid elevated tariff rates, driven by commercial segment outpacing the other lower yielding segments.
AmInvestment Bank went on to note that poorer generation output mix of 41:53:6 for gas, coal and others alongside costlier coal ballooned fuel cost.
“Fuel cost grew nine per cent for the quarter despite revenue contracting,” AmInvestment Bank said.
The research firm added that correspondingly, earnings before interest, depreciation and amortisation (EBITDA) margins declined 2.1 percentage points (ppts) as it contracted 2.9 per cent y-o-y to RM4.093 billion for the quarter.
Fuel cost aside, the research firm lowered its overly optimistic operating margin assumptions to reflect higher execution risk given the persistent cost overruns.
AmInvestment Bank also lowered its FY17-18F earnings by three per cent to five per cent after revising its operating margin assumptions.
However, AmInvestment Bank maintained ‘buy’ call on the stock.
“We downplay concerns over new regulatory period two parameters as we think TNB’s fundamentals are firmly entrenched with its resilient earnings visibility, robust balance sheet and exciting merger and acquisition (M&A) outlook,” the research firm said.
As for Kenaga Research, the research arm kept its estimates unchanged as 4Q17 is anticipated to be a strong quarter as the expected Imbalance Cost PassThrough (ICPT) under-recovery will boost TNB’s top-line thus flow through the group’s bottom-line as well.
“However, the question remains if fuel costs are rising higher which will nett off the Power Purchase Agreement (PPA) savings fund of RM500 million currently, will the government allows TNB to raise tariff rates in the future,” the research arm said.
“Nonetheless, in the principle of ICPT framework, fuel cost risk is passed through to end consumer, thus with neutral impact to TNB’s earnings.”
Kenanga Research thus remained bullish on TNB given the group’s unwarranted low valuations despite its index-linked heavyweight status and earnings quality profile.
All in, TNB remained as the research arm’s ‘top pick’ with ‘outperform’ rating.