Tenaga is expected to be largely unaffected by the drop in electricity demand and electricity tariff relieve measures. YTLP continues to be dragged by Singapore Seraya and YES, while management is working towards turning around these entities. We maintain NEUTRAL call on the sector with BUY recommendation on Tenaga (unchanged TP: RM13.20, based on DCFE) and HOLD recommendation on YTLP (unchanged TP: RM0.75, based on 20% discount to SOP).

Tenaga (BUY; TP: RM13.20)

Earnings intact. Despite Malaysia’s power demand is expected to drop 7-15% in 2020, Tenaga earnings will remain largely unaffected. 1) Power generation: Protected by PPA (Power Purchasing Agreement)/SLA (Service Level Agreement), where bulk of the revenue is based on capacity payments. Capacity payment is fixed as long as there is no unscheduled shutdown of the power plants, affecting the plants’ availability. 2) Transmission & Distribution: Protected by the Revenue Cap structure of IBR (Incentive Based Return), where earnings are guaranteed at annual 1.8-2.0% power demand growth. Tenaga will be able to recoup back any shortfall in earnings when actual power demand growth falls below the 1.8-2.0% growth and vice versa if actual growth exceeds 1.8-2.0%.

Tariffs relieve measures. Government has announced several tariffs rebate measures to provide relieves to consumers. The total costs of these measures amount to RM2.4bn, which will be jointly funded by government, KWIE and Tenaga. Tenaga’s share of funding is RM250m, on top of its RM10m commitment to support Covid-19. Tenaga intends to claim tax relieve for the RM260m CSR commitment, indicating potential bottomline impact of RM200m, c. 4% of its RM5.0-5.5bn earnings.

Maintain BUY, TP: RM13.20. We maintain BUY recommendation on Tenaga with unchanged DCFE-derived TP: RM13.20. Tenaga’s earnings and cash flow are expected to be stable under the IBR/ICPT mechanism. Dividend is expected to remain stable at 50-60sen/share.

YTLP (HOLD; TP: RM0.75)

Singapore Seraya… has been in the red territory since early 1QFY19 due to overcapacity of power generation in the country and fixed take-or-pay contract of LNG import up to 2023. The recent acquisition of Tuaspring power assets, will enable Seraya to grab higher market share, while leveraging onto Tuaspring’s more efficient assets and its free of LNG take-or-pay obligation.

Wessex. Under the new 2020-2025 business plan, Wessex earnings is expected to reduce to an average of UK£80-85m per annum as compared to previous period of over UK£100m per annum, given the UK government’s stringent allowable return on WACC at 2.0% (vs. 3.7% in previous business plan).

New Jordan and Indonesia plants. 45% owned Attarat Jordan plant remains on track to commence operation by end 2020. The 80% owned Tg Jati plant has received business viability guarantee letter from Indonesia government and working toward financial closing. We expect Tg Jati to only commence operation by 2024-2025.

HOLD, TP: RM0.75. We maintain HOLD recommendation on YTLP with unchanged TP: RM0.75 based on 20% discount to SOP: RM0.94. While we expect near term outlook to be affected by Covid-19, the group has been strategizing in turning around the loss-making Singapore Seraya and YES Communications.

Source: Hong Leong Investment Bank Research - 16 Jul 2020