AmWatch - Tenaga Nasional : 1HFY15: Supported by low generation costs BUY, 28 Apr 2015

STOCK FOCUS OF THE DAY

Tenaga Nasional : 1HFY15: Supported by low generation costs    BUY

We reiterate BUY on Tenaga Nasional with an unchanged DCF-derived fair value of RM17.00/share, which implies an FY15F PE of 15x and P/BV of 2x.

Tenaga reported a 2QFY15 net profit of RM2.2bil (QoQ: -8%; YoY: +24%) to lift its 1HFY15 net profit to RM4.5bil (YoY: +29%). The group also declared a single-tier interim DPS of 10sen. While Tenaga’s annualised 1HFY15 earnings appear to be ahead (74%) of our and consensus expectations of ~RM6.5bil, we highlight that the group’s reported numbers have yet to reflect the estimated cost over-recovery of ~RM1.5bil (for the Sept 2014-Feb 2015 period) under the Imbalance Cost Pass Through (ICPT) mechanism.

Recall that the government had in Feb 2015 signified its commitment to fully implement the ICPT mechanism by allowing the ICPT savings to be passed on to consumers in the form of 5.8% and 3.5% tariff reductions in Peninsular Malaysia and Sabah, respectively for March-June 2015. We understand that Tenaga has not provided for this rebate (ICPT savings availability of RM727mil) as it awaits final confirmation and guidance from the government. Excluding the cost over-recovery and forex losses totalling RM257mil, Tenaga’s 1HFY15 core net profit met 50% of our and street estimates.

Its improved 1HFY15 performance vs. 1HFY14’s can be attributed to higher revenue amidst lower operating expenses.  Its EBITDA margins were up 10ppts YoY. On a sequential basis, its 2QFY15 revenue was negatively impacted by the seasonal slowdown in electricity demand. At the current price, Tenaga is trading at an FY15F P/BV of 1.8x. The stock also offers an attractive forward PE of 13x, compared with the stock’s three-year average band of 10x-16x. We believe that Tenaga’s valuation moving forward will be well supported by its more stable earnings profile and cash flows.

Others :

KKB Engineering : 1Q positive earnings surprise                 BUY

Malaysia Marine & Heavy Engineering : Pressure on the offshore business           HOLD

Digi.Com : 2nd consecutive quarter of earnings contraction          HOLD

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