Tenaga’s 3QFY20 core PATMI of RM1.3bn (+47.9% QoQ; +2.4% YoY) and 9MFY20 of RM3.2bn (-23.9% YoY), was within HLIB expectation (75.0%) and consensus (72.2%). Tenaga’s major earnings stream remains intact under the Revenue Cap and PPA/SLA structure s. Management expects continued earnings recovery into 4QFY20 and FY21 with the gradual opening of economy and implementation of stimulus measures. Management has set up a new International Asset Group to expand the group’s oversea business portfolio, targeting EBIT RM2bn contribution to the group by 2025 (from RM0.1bn in 2020). We maintain our BUY recommendation on Tenaga with unchanged DCFEderived TP of RM12.50.

Within expectation. Tenaga’s reported 3QFY20 core PATMI at RM1.3bn (+47.9% QoQ; +2.4% YoY) and 9MFY20 at RM3.2bn (-23.9% YoY). We deem the results within HLIB’s expectation (75.0%) and consensus (72.2%). During 9MFY20, the group recognised the following EIs: forex translation loss of RM174.3m, net provisions and impairments of RM504.9m, and contributions to Covid-19 amounting to RM273.0m.

Dividend. None.

QoQ. Core earnings rebounded 47.9% to RM1.3bn following recovery in group sales (including maintenance and manufacturing) as the government re-opened the economy and implemented stimulus plans as well as lower effective tax rate.

YoY. Core earnings was relatively flattish +2.4% as the improvement in margins was offset by the higher net finance costs as the group spent on regulatory capex and new generation capex as well as paid off special a dividend for year end 2019.

YTD. Core earnings declined 23.9%, affected by Covid-19 and implementation of MCO during the earlier part of 2020, outages of Manjung 2 (1QFY20 and 2QFY20) and Manjung 5 (2QFY20) and higher impact of MRFS16 by RM392.4m.

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). Power demand saw a recovery in 3QFY20 and is expected to continue into 4QFY20 and FY21, following the gradual re-opening of the economy along with implementation of stimulus plans.

Foreign investments. Management has set up International Asset Group (IAG) to steer the growth of its oversea investments. The new unit has been tasked to restructure GMR and GAMA business, while continuing to scale up the RE portfolio by leveraging onto its Vortex Solar (VS) and Wind Ventures (WV). The main focus area of growth would be UK and Europe markets (leveraging onto VS and WV) and South East Asia market (partnering with Sunseap, the largest solar player in Singapore). With IAG in place, Tenaga’s international business is targeted to grow exponentially from EBIT RM0.1bn (total asset RM5bn) in 2020 to RM2.0bn (total asset RM33bn) in 2025.

Forecast. Unchanged.

Maintain BUY, TP: RM12.50. We maintain BUY on Tenaga with unchanged DCFEderived TP: RM12.50, given stable cash-flow and dividend payout. Tenaga’s earnings are expected to be rebound in FY21.

Source: Hong Leong Investment Bank Research - 27 Nov 2020