TNB’s Latest Results Lacked Spark

MIDF notes that the national utility giant TNB’s FY23 results had disappointed expectations, the group registered a core net profit of RM636m in 4QFY23, which brought FY23 core net profit to RM3.18b down -16%yoy after normalising for RM291m forex translation loss and RM124m impairment of intangible asset. The full year core earnings accounted for 94%/91% of consensus estimates.

The group however declared a final dividend of 28sen/share, bringing full year dividend to 46sen per share, representing a generous 82% DPR against core earnings.

Despite absence of negative fuel margins in 4QFY23 (which presumably has stabilised in line with stabilising coal prices), net profit was down -20%qoq due to higher operating cost, which was unusually higher despite typically being backloaded. In addition, Genco fell into an LBIT, which we reckon was due to outage at its Manjung plant since late 4QFY23. On a full year basis, core earnings were down – 16%yoy to RM3.18b mainly due to Negative fuel margin of -RM619m Step down in CRF of selective generation plants of -RM418m.

However, this was partly offset by lower net interest expense due to reduced borrowings, in line with easing working capital requirements given moderating fuel prices. Improving balance sheet. On a positive note, balance sheet continued to improve. Receivables receded further to RM10.4b from improved cost recovery via ICPT and collection of Government subsidy.

Net gearing eased further to 69% (3QFY23: 76%) as cash levels rose in tandem with improved fuel cost recovery and moderating fuel prices. Earnings estimates. MIDF said it has trimmed the FY24F/25F net profit by -11%/-6% to reflect higher operating cost and the step-down in CRF for Genco. The +34%/+10%yoy growth in FY24F/25F net profit is expected to be driven by absence of negative fuel margins and underlying growth in regulated earnings.

Despite the earnings revision, overall capex has been running below earlier estimates and given adjustments to capex projection, DCF-based TP remains largely unchanged at RM11.00 (WACC: 8.8%, TG: 1%). The house said it still likes Tenaga as a beneficiary of NETR but we believe valuations have run ahead of fundamentals at this juncture. The stock is now trading at 15x FY24F PER, at a premium to historical mean of 13.5x. As such, the house has for now downgraded Tenaga to NEUTRAL from BUY

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