KUALA LUMPUR: Tenaga Nasional’s core net profit for the nine months ended May 31, 2017 was slightly below expectation at 73% of CIMB Equities Research’s full year and 71% of consensus due to higher-than-expected effective tax rate in 3QFY17.It said on Friday core net profit 9MFY8/17 fell 8% on-year due to higher finance cost and effective tax rate of 15.5% (vs. 9.8% in 9MFY8/16) as a result of higher deferred tax expense.“We cut our FY17-19F EPS by 3%-5% to account for a potentially higher effective tax rate in view of a reduction in tax reinvestment allowance. But, its actual average tariff is about 2% higher than the base tariff set by the IBR due to higher electricity consumption by the commercial sector.However, when the regulator revises the IBR parameters for RP2 starting in 2018, the allowable return may be lowered and CIMB Research sees potential earnings risk and Tenaga may no longer enjoy the additional 2% tariff.“Nevertheless, assuming Tenaga is only allowed to earn a 6.5% return (its WACC, based on our estimates) on its T&D assets and the 2% mark-up in tariff is entirely removed, we estimate that Tenaga’s net profit could be lowered by as much as RM1bil per annum.“This, plus the risk of a higher effective tax rate, may lead to a RM2bn reduction in Tenaga’s annual net profit. However, even if all these risks materialise, Tenaga would trade at 16x CY18 P/E, below PetGas’s 18 times, Malakoff’s 26 times and Gas Malaysia’s 21 times.“Following the earnings revision, we keep our Add call with a lower RM15.70 TP, still based on 12.5 times CY18 P/E, five-year historical mean.“We still believe its earnings will not be affected by the rising fuel cost. The stock trades at 11 times CY17 P/E, making it the cheapest big-cap utilities stock in our coverage.“Potential catalysts are stronger organic earnings growth and acquisition of new assets. The key downside risk to our call is a sell-down of Malaysian equities as Tenaga is often seen as a proxy for the Malaysian stock market,” it said.

Source: The Star July 28, 2017 00:00 UTC