Tenaga’s 4QFY20 core PATMI of RM1.5bn (+5.7% QoQ; +48.4% YoY) and FY20 of RM4.5bn (-10.9% YoY), was slightly above HLIB expectation (106.9%) and consensus (105.3%). Tenaga’s major earnings stream remains intact under IBR structure. Management expects Tenaga to ride on the gradual economy recovery in 2021 under a more favourable structure of the extended RP2-2021. We maintain our BUY recommendation on Tenaga with unchanged DCFE derived TP of RM12.50.

Above expectation. Tenaga’s reported 4QFY20 core PATMI at RM1.4bn (+5.7% QoQ; +48.4% YoY) and FY20 at RM4.5bn (-10.9% YoY). We deem the result slightly above our expectations (106.9%) and consensus (105.3%). The group recognised the following EIs: forex translation gain of RM71.6m, net provisions and impairments of RM726.1m, and contributions to Covid-19 amounting to RM273.0m.

Dividend. Declared a final dividend of 18 sen/share and a special dividend of 40 sen/share (ex-date: to be announced on later date). Total dividend for FY20 was 80 sen/share (7.9%).

QoQ. Core earnings increased 5.7% to RM1.4bn mainly due to recognition of reinvestment allowance incentive claim for project completed, resulting net positive tax credit of RM473.3m during the quarter.

YoY. Core earnings jumped 48.4% due to power outages in some of TNB’s own power generation plants – Kapar and Manjung in 4QFY19, lower power generation costs and recognition of reinvestment allowance incentive claim in 4QFY20.

YTD. Core earnings declined -10.9% to RM4.5bn, affected by Covid-19 and implementation of MCO during the earlier part of 2020, outages of Manjung 2 and Manjung 5 in 1H20 and higher impact of MRFS16 by RM241.4m.

Recovery in 2021. Management expects further recovery in power demand along with the economic growth in 2021, underpinned by the various stimulus plans implementation and commencement of national vaccination program. Unlike MCO1.0, most economic activities remained operational during MCO2.0 (albeit lower capacity).

Extended RP2-2021. Tenaga’s major earnings stream under IBR structure remains intact under RP2 with estimated RM4.2bn in FY20. Energy Commission has agreed for an extended RP2 to 2021 with favourable terms on higher allowable capex, opex and allocation for allowance for doubtful debts (earnings recovery for retail segment in 2021). Base tariff is maintained at 39.45sen and allowable WACC returns at 7.3%.

Re-imagining TNB. Post restructuring, TNB will continue to diversify and pursue opportunities within RE segment both domestically and internationally in order to achieve its target 8.3GW RE generation capacity (current: 3.4GW). Newly established TNB Power Generation (TPGSB) subsidiary will continue to focus on operational excellence, plant turnaround and assets & services expansion. It was revealed that TPGSB managed to improve its operational profit from RM450m in 2HFY19 to RM1.0bn in 2HFY20. Management is also disposing its investment in Liberty Power in Pakistan (by 2HFY21) and to reinvest the proceeds into RE portfolio.

Forecast. Unchanged.

Maintain BUY, TP: RM12.50. We maintain BUY on Tenaga with unchanged DCFE derived 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 - 1 Mar 2021