Tenaga’s 2QFY20 core PATMI of RM861.1m (-16.4% QoQ; -35.1% YoY) and 1HFY20 of RM1,898.1m (-35.1% YoY), was below HLIB expectation (37.8%) and consensus (37.8%), affected by MCO and higher than expected tax. Tenaga’s major earnings stream remains intact under Revenue Cap structure and PPA/SLA structure. Management expects earnings to recover in 2HFY20 with the gradual opening of economy and implementation of PENJANA stimulus. We maintain our BUY recommendation on Tenaga with lower DCFE-derived TP: RM12.50 (from RM.13.20).

Below expectation. Tenaga’s reported 2QFY20 core PATMI at RM864.1m (-16.4% QoQ; -35.1% YoY) and 1HFY20 at RM1,898.1m (-35.1% YoY). We deem the results below HLIB’s expectation (37.8%) and consensus (37.8%). The disappointment was mainly due to lower revenue (affected by MCO), coupled with higher than expected effective tax. During 1HFY20, the group recognised forex translation loss of RM332.5m and net provisions and impairments of RM200.5m.

Dividend. Declared an interim dividend of 22sen/share (no details yet) for 1HFY20.

QoQ/YoY/YTD. Core earnings dropped -16.4% QoQ, -35.1% YoY and 35.1% YTD, affected by several factors:

1) lower power demand (impacting retail segment, maintenance and manufacturing);

2) outages of Manjung 2 (1QFY20 and 2QFY20) and Manjung 5 (2QFY20);

3) RM148m discount and contribution for Covid-19 measures (mainly 2QFY20);

4) higher tax (lower capital allowances following slower progress of capex spending during the quarter due to stop work during MCO period);

5) higher impact from MFRS 16 in 2QFY20: –RM245.2m (vs. 1QFY20: –RM163.4m; 2QFY19: –RM135.0m) and 1HFY20: –RM408.6m (vs. 1HFY19: –RM112.2m);

6) lower regulatory adjustment in 1HFY20.

Sustainable earnings. Tenaga’s major earnings stream 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). Nevertheless, its Retail segment (under Price Cap) and other subsidiaries (e.g. SESB, GSPARX, REMACO etc) were affected by MCO in 1HFY20 due to lower power demand, stop work order and lower demand. On the brighter side, management guided power demand has seen upticks and job orders have resumed since implementation of RMCO in June, resulting earnings rebound in 2HFY20.

RP3. Government has agreed to Tenaga’s proposal to introduce a gap year 2021 post ending of RP2 in 2020. The introduction of gap year was meant to better assess the various factors e.g. (power demand, fuel costs, equity risks, bad debts etc) in setting RP3 terms. Effectively RP3 will be implemented for 2022-2024.

Foreign investments. Contributions from UK Vortex, Wind Ventures and Shuaibah remained stable, 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.

Forecast. Cut earnings for FY20-FY22 by 14.4%, 7.2% and 7.5% respectively, following adjustments to revenue and costings.

Maintain BUY, TP: RM12.50. We maintain BUY on Tenaga with lower DCFE-derived TP: RM12.50 (from RM13.20), with Tenaga’s stable cash-flow and dividend payout. Tenaga’s earnings are expected to be rebound in 2HF20.

Source: Hong Leong Investment Bank Research - 1 Sept 2020