Tenaga’s operations are still on-going with minimal disruption during MCO. Management expects earnings to remain largely unaffected by Covid-19, as the group is shielded by RAB structure (transmission and distribution) and PPA structure (power generation). Tenaga will contribute RM150m to partly fund the stimulus measures by government (mainly funded by KWIE) on top of its RM10m CSR for Covid-19, with an expected minimal RM120m impact (net of tax) to its RM5.5bn earnings in 2020. Maintain BUY recommendation with unchanged DCFE derived TP: RM13. 50, we expect Tenaga’s earnings and dividend payout to remain sustainable.

Sustainable earnings. Tenaga’s operations remain as usual with minimal disruption in order to ensure no interruption of power supply to the nation during the Movement Control Order (MCO) period. Overall power demand may drop due to Covid-19, but management expects earnings to be largely unaffected under the Regulated Asset Base (RAB) structure based on Revenue Cap for its Transmission and Distribution segment and Purchasing Power Agreement (PPA) & Service Level Agreement (SLA) based on Capacity Payments for its Power Generation segment. Tenaga will be compensated in the upcoming ICPT review, in order to address the shortfall of earnings due to lower than assumed power demand of +2% YoY. Hence, there will be minimal impact to P&L (accrual accounting), but delay in terms of cash flow into 2H20.

Stimulus plan. Management reiterated that Tenaga will only contribute RM150m with the remaining by KWIE (net inflow of RM1.1bn in 2019) to fund the government’s “Covid-19 stimulus” measures, which includes: 1) 15% discount in monthly electricity bills to hotels, travel agencies, airlines, shopping malls, conventions and exhibitions centres; 2) 2% discount to all users; and 3) tiered discounts of 15-50% to residential segment of up to 600kWh/month. The RM150m is on top of its CSR activity of RM10m commitment to support Covid-19. Management intends to claim tax relieve for the RM160m commitment, indicating minimal impact of RM120m to net profit. The accelerated Tenaga investment of RM2bn on top of existing RM11bn commitment in 2020, will be covered under the RAB structure. Hence, Tenaga will not be materially impacted by the announced stimulus.

Foreign investments. 1) Turkey GAMA is likely to be affected by the slowing demand for power in the country (merchant market), while its debt restructuring is still pending finalization of documentations. Nevertheless, Tenaga has already fully written down its investment to nil back in 2019. 2) Similarly, India GMR will also be affected by the slowing power demand, while its on-going asset monetization restructuring exercises may also be affected. Tenaga’s investment value of circa RM450m may be subject to further impairment. 3) UK Vortex and Wind Ventures are expected to remain stable under the country’s renewable energy tariff structure.

MESI 2.0. Under the new government, there is still no change of direction for MESI 2.0. Tenaga’s strategy team is still working with Energy Commission towards the respective pillars of MESI 2.0. To recap, MESI 2.0 is 10-year masterplan to introduce liberalisation across the industry from fuel sources, generation to transmission and distribution and retail in Peninsula Malaysia.

Forecast. Unchanged for FY20-21.

Maintain BUY, TP: RM13.50. We maintain BUY recommendation on Tenaga with unchanged DCFE-derived TP: RM13.50. Tenaga’s earnings are expected to be sustainable at current level with stable cash-flow and dividend payout. Management is committed on its dividend payout policy 40-60% of its adjusted earnings, and we are imputing 60sen payout for FY20-21.

Source: Hong Leong Investment Bank Research - 9 Apr 2020