Tenaga Nasional (TNB)’s net profit declined 42% YoY in 2QFY20 to RM653.3m, mainly due to lower income from non-regulated business, higher net negative movement from MFRS16 and higher effective tax rate. Excluding forex loss, its 1HFY20 core net profit was at RM1.7bn (-44% YoY), below our and consensus full-year estimates, accounting for 34% respectively. Lower YoY net profit was also due to allowance for doubtful debt for its retail business amounting to RM138m, in anticipating of slower collection from weaker economic conditions. Electricity demand in 2QFY20 declined 15% YoY due to movement control order (MCO). We adjust our earnings downwards by an average of 9-17% for FY20- 22F, to account for lower income from non-regulated business, higher effective tax rate and finance cost. We maintain our Neutral call on TNB, with a lower target price of RM12.42, based on DCF-valuation (previously RM13.28). During the quarter, TNB declare an interim single tier dividend of 22 sen per share, translating to a payout of 59% of adjusted Group PATAMI.

• Lower revenue due to lower non-regulated business and ICPT rebate. Revenue for 2Q20 dropped by 15% YoY to RM10.9bn as it reported lower subsidiaries’ contribution for non-regulated business due to MCO (-47%) and imbalance-cost-pass-through (ICPT) being in a rebate position of RM215m due to lower fuel costs (i.e. coal and gas prices), compared to ICPT surcharge of RM426m in 2Q19. Electricity demand during the quarter declined 15% YoY, with Industrial and Commercial sector falling by 15% YoY respectively, but partially offset by higher demand from Domestic sector (i.e. Residential) at 12% YoY. Electricity consumption for 2Q20 was lower at 25,598GWh mainly from lower contribution from iron and steel, cement products, electric and electronic, retails, educational and accommodation industries.
   
• Lower PATAMI mainly due to impact from MCO and higher tax expenses. For 2Q20, its operating profit in 2Q20 fell 12% YoY, mainly due to lower contribution from non-generation business of RM237m, retail loss due to allowance for doubtful debt, lower contribution from generation business as a result of plant outages at Manjung Five in June 2020 as well as higher net movement from MFRS16. We understand that Manjung 5 is now back for operation from early August 2020. In addition, TNB also reported higher tax expenses in 2Q20 due to lower capital expenditure resulted from delay in project completion. Overall, its core net profit declined 57% YoY to RM594m, bringing its 1HFY20 core net profit to RM1.7bn (- 44%).
   
• Dividend. The Board has approved an interim single tier DPS of 22 sen (vs 1H19: 30 sen), translated to a dividend payout of 59% (vs 1H19: 54.5%). Payment date will be announced in due course.

Source: PublicInvest Research - 1 Sept 2020