Tenaga’s 1QFY20 core PATMI of RM1,034m (+116.1% QoQ; -35.1% YoY), was below HLIB expectation (18.6%) and consensus (19.7%) due to lower than expected EBITDA margin and higher than expected MFRS 16 impact. Management reiterated Tenaga’s earnings remains intact despite the power demand slowdown, as Revenue Cap structure guaranteed earnings at demand growth of 1.8-2.0% and PPA/SLA structure guaranteed capacity payments. We maintain our BUY recommendation on Tenaga with lower DCFE-derived TP: RM13.20 (from RM13.50).

Below expectation. Tenaga’s reported 1QFY20 core PATMI at RM1,034.0m (+116.1% QoQ; -35.1% YoY), was below HLIB’s expectation (18.6%) and consensus (19.7%) mainly due to lower than expected EBITDA margin, coupled with higher than expected accounting impact from MFRS 16. During 1QFY20, the group recognised forex translation loss of RM388.0m and net provisions and impairments of RM127.5m.

Dividend. None. Usually Divvy in 2Q and 4Q.

QoQ. Core earnings jumped 116.1%, mainly due outages of Manjung 2 and Kapar 6 in previous 4QFY19, as well as lower regulatory adjustment in 1QFY20.

YoY. Core PATMI declined 35.1% attributed to: 1) negative impact of MFRS 16 in 1QFY20 at RM163.4m as compare to positive impact in 1QFY19 of RM22.4m; 2) outage of Manjung 2 until mid-1QFY20; and 3) commencement of Jimah East since July 2019.

MFRS16. Implementation of MFRS 16 (finance lease) has resulted increase in net operational and finance costs of -RM163.4m in 1QFY20 as compared to -RM169.3m in 4QFY19 and +RM22.4m in 1QFY19.

Sustainable earnings. Tenaga’s earnings remains intact as Revenue Cap structure guaranteed earnings at demand growth of 1.8-2.0% (transmission and distribution) and PPA/SLA structure guaranteed capacity payments (power generations). Hence, the group was relatively unaffected by the drop in power demand of 2.9% QoQ and 1.9% YoY in 1QFY20. Management reiterated earnings to sustain and remains committed to its dividend payout policy in 2020, while guiding 2020 power demand to drop 7-15%.

RP3. RP2 is expected to come to end by end 2020, and management is concluding RP3 terms with the government, which will be implemented for 2021-2023. Management has proposed to introduce a gap year for 2021, and push the effective implementation of RP3 to 2022-2024, as Covid-19 and MCO are affecting the various factors (e.g. power demand, fuel costs, equity risks etc) in setting RP3 terms.

Foreign investments. UK Vortex, Wind Ventures and Shuaibah are relatively insulated from Covid-19 impact. Turkey Gama and India GMR are affected by lower energy demand and supply chain disruption. Gama has restructured its loan, which will improve its liquidity, while management is strategizing to monetize GMR assets.

Forecast. Cut earnings for FY20-21 by 11.1% and 8.5% to RM4.9bn and RM5.2bn respectively, following adjustment on revenue and costing. We also introduce FY22 core profit at RM5.5bn.

Maintain BUY, TP: RM13.20. We maintain BUY on Tenaga with lower DCFE-derived TP: RM13.20 (from RM13.50). Tenaga’s earnings are expected to be sustainable with stable cash-flow and dividend payout

Source: Hong Leong Investment Bank Research - 11 Jun 2020