Monday, August 03, 2015

Tenaga: Profit dropped

Results Update

For QE30/6/2015, Tenaga's net profit dropped 63% q-o-q or 54% y-o-y to RM789 million while revenue dropped 6.6% q-o-q or 13.9% y-o-y to RM9.9 billion. The sharp drop in profit was mainly due to reversal of Cost Pass-Thru adjustment. For more on this, see CIMB's comment in its July 31 report:
Tenaga’s reported net profit in 3Q15 was 51% lower yoy, at only RM789m. The group booked in a RM1.8bn Imbalance Cost Pass Through (ICPT) over-recovery amount from Jan 2014 to May 2015 in the quarter. By stripping out this one-off impact and other non-core items, we estimate its core net profit in 3Q15 at RM1.8bn, 23% higher than last year. The stronger performance was due mainly to taxation as it recognized a tax credit of RM32m in the quarter compared to a tax expense of RM231m in 3Q14. On top of that, the higher generation from coal plants in 3Q15 also lowered Tenaga’s expenses against the corresponding quarter last year. Although changes in fuel costs should not affect Tenaga’s bottom line under the ICPT, the amount under-recovered in 3Q14 was not recognized as the ICPT was only implemented on 1 Mar 2015.

Table 1: Tenaga's last 8 quarterly results

Chart 1: Tenaga's last 29 quarterly results

Recent Corporate Development

Since March this year, Tenaga's share prices had declined from around RM14.50 to RM12.20 on 31/7/2015. The drop was prompted by concern surrounding Tenaga's acquisition of a 70%-stake in Project 3B from EDRA ( a subsidiary of 1MDB) and recently its possible acquisition of 13 power assets from  EDRA. While the sum paid for the stake in Project 3B was fairly reasonable, the price for the 13 power assets could be above the market rate since EDRA purchased at high prices previously and it is unlikely to sell at a loss. Would Tenaga still purchase these power assets if their price tags are above their fair value? Can Tenaga say "NO" to 1MDB?

You can see the timeline of the various announcement and the subsequent price decline.

Chart 2: Tenaga's daily chart from Jan to Jul 2015 (Source: CIMB)


Tenaga (closed at RM12.20 last Friday) is now trading at a trailing PER of 10.3 times (based on last 4 quarters' EPS of 117.9 sen). CIMB assigned Tenaga a Fair Value of RM16.38 based on FY17 PER of 12.7 times (FY17 EPS of 129 sen). This means that Tenaga is now trading at an undemanding PER of only 9.5 times its FY17 EPS.

Technical Outlook

From Chart 2 below, we can see that Tenaga has pulled back to its tentative uptrend line, SS support at RM12.00-12.20.

Chart 3: Tenaga's monthly chart as at July 31, 2015 (Source:

However, a look at the 20-year chart shows that Tenaga's 10-month EMA line has already curved downward. In the past, this negative signal - coming after a long rally - has signaled a top for the stock. These happened in 2000 & 2007. Will Tenaga escape the third time?

Chart 4: Tenaga's monthly chart as at July 31, 2015 (Source:

Another thing to consider is the correlation between Tenaga's price movement and the election cycle. We have seen Tenaga rallied after each of the past 4 elections in 1999, 2004, 2008 & 2013. This is likely due to market re-rating the stock higher on prospects of tariff adjustments. On the other hand, prior to each election, Tenaga's share price would decline because tariff adjustment would be deferred and earnings would suffer.

Under the cost pass-thru regime, this cycle should be a thing of the past. However, the recent political crackdown shows that the government has no hesitant to bend rules or laws to achieve its objectives. I suspect that the cost pass-thru regime would not stop this Government if it wishes to undertake populist actions (like suspending tariff adjustment) in order to gain support from the populace. While the market may not have to worry about this point today because raw material costs are trending lower, this could all change if the price of gas & coal prices reverse. Thus, I believe the election cycle may remain in force for Tenaga. And, this could well put downward pressure on the share price as 2018 election approaches.


Based on satisfactory financial performance, attractive valuation and mildly positive technical outlook, Tenaga should be a good stock to consider for long-term investment. However, if Tenaga breaks below the RM12 mark, the stock's technical outlook would turn decidedly negative. The political pressure to pay a "good price" for the 13 power assets to be acquired from EDRA could be the trigger. Going forward, the market may have to wrestle with renewed "national service" heaped onto Tenaga - notwithstanding the cost pass-thru regime in place.

In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, Tenaga.

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