Investment Highlights

• OVERWEIGHT. We like the power sector for its recurring cash flows and earnings recovery in 2021F. Although net profit of power companies is expected to be unexciting in FY20E, we believe that the companies would be able to sustain their dividend payments on the back of positive cash flows. Also, we expect electricity demand to recover in 2021F after being affected by the Covid-19 outbreak in 2020E.

• We forecast Tenaga Nasional’s (TNB) net profit to fall by 18.5% to RM3.9bil in FY20E before rebounding by 29.8% in FY21F. We have assumed that electricity demand would shrink by 6.0% in FY20E before recovering by 9.5% in FY21F. Malakoff is expected to record a core net profit growth of 53.9% in FY20E on the back of earnings contribution from Alam Flora and improved performance from the Shuaibah assets in Saudi Arabia. Alam Flora is estimated to account for 6.8% of Malakoff’s FY20E EBIT. We anticipate a 26.5% decline in YTL Power’s (YTLP) FY21F net profit dragged by stiff competition in the open electricity market in Singapore, higher depreciation expense in the UK and larger losses in the telecommunications unit.

• Decent dividend yields. Malakoff’s FY20E dividend yield of 5.5% (based on share price of RM1.00) is the highest among the companies in our coverage. We have assumed a FY20E gross DPS of 5.5 sen (FY19: 6.5 sen) for Malakoff. We forecast TNB’s FY20E dividend yield to be 3.0% based on a gross DPS of 35 sen (FY19: 100 sen) and share price of RM11.50. We estimate YTLP’s FY21F dividend yield to be 3.6% based on a gross DPS of 2.5 sen and share price of RM0.69.

Outlook and developments in 2H2020

• Electricity volume growth of -6.0% in 2020E. We are now assuming that Malaysia’s electricity demand would fall by 6.0% in 2020E compared with a 2% increase previously (1Q2020: -1.9% YoY). Malaysia’s electricity demand growth is expected to be poor this year due to the drop in economic activities during the two-month movement controlorder (MCO) from 18 March to 12 May 2020.

• We reckon that energy demand from the industrial and commercial sectors would decline in FY20E as some factories operated at only 50% of their production capacity during the MCO. Also, shopping malls were closed for nearly two months. The industrial sector accounted for 39.8% of TNB’s electricity sales volume in FY19 while the commercial sector accounted for 34.7%. The domestic (residential) sector made up 23.4% of TNB’s electricity sales volume in FY19 while “others” (mining, agriculture, lighting, etc) accounted for the balance 2.1%.

• Electricity consumption to recover in 2021F. We believe that the country’s economy would recover in 2021F after being hit by the Covid-19 pandemic in 2020E. Consensus has projected Malaysia’s GDP to be 5.2% in 2021F vs. -2.7% in 2020E. As such, we have assumed that TNB’s electricity sales volume would improve by 9.5% in FY21F compared with -6.0% in FY20E.

• Energy reforms at a standstill? Due to the change of government in March 2020, Malaysia has a new Minister of Energy and Natural Resources. We reckon that there would not be any progress on the energy reforms proposed by the previous minister. Hence for now, TNB would continue to be the sole player in the transmission and distribution (T&D) network and retail segment. There would not be any third-party access in the T&D segment for now.

• New energy proposals? Although previous energy reforms may not be implemented, we are unsure if the Cabinet would come up with new energy proposals. We draw comfort from the fact that any proposal would have to be in accordance with RP2 (Regulatory Period) or RP3 guidelines, which protect TNB’s rate of return at 7.3% (based on RP2 guidelines). Also, electricity tariff for the households in Malaysia has not increased in the past few years as any increase was subsidised by the country’s Energy Industry Fund. We do not know how much cash is left in the Energy Industry Fund but we believe that TNB transfers between RM500mil and RM1bil to the fund each year. TNB transfers the cash from the cost savings from renegotiated 1st generation power purchase agreements (PPAs) and excess returns when TNB’s revenue exceeds the price and revenue caps under RP2 guidelines.

Source: AmInvest Research - 10 Jul 2020