Tenaga TNB) reported a disappointing set of 2019 results, as corePATAMI of RM4,365m (-16% yoy) fell below both ours and consensus estimates, delivering only 75% and 78% of our respective forecast. The board also declared a 50sen special DPS, which came as a positive surprise to us. The weaker-than-expected performance was due to unplanned outages of 2 of its power plants, and several cost items related to the ongoing restructuring. However, we are upgrading our call to BUY from Hold with a lower TP of RM13.55, as we believe that TNB will start actively assessing the efficiency of their capital.

Weak 4Q19 Due to Outages and Reorganisation

The disappointing 4Q19 results was the main cause that led to the weak 2019 numbers, as core-PATAMI at RM54m, declined by 96% qoq. The prolonged unplanned outages of 2 power plants in 4Q19, which was only resolved recently, had resulted in loss of income of around RM300m. Apart from that, management also highlighted that there was an additional cost of RM300m related to the reorganisation during the quarter. We believe that the impact is short-term in nature, and we are expecting improvement in the coming quarters.

Still on Track to Meet Capex Plan for RP2

We were expecting a reduction in TNB’s capex from the current RM11.2bn, as the Jimah East Power (2,000MW) power plant was recently completed. Management has also guided that they are on schedule to meet the regulated entities capex by end of 2020, as TNB might be penalised if they fail to meet the target, similar to 2018. The accelerated RM2bn capex that was announced recently as part of the Covid-19 stimulus package, will be carried by bringing forward capex for its regulated asset. As such, we expect TNB to be compensated for the capex spent in RP3.

Upgrade to BUY With a Lower TP of RM13.55

Although we have lowered our EPS forecast for FY20E by 3.9% (to factor in the unplanned outages of the power plant in Jan), we are upgrading our call from Hold to BUY with a revised 12-month DCF-based TP of RM13.55. We believe that the special DPS of 50sen announced is just the beginning of its capital management initiatives, as the current net debt/equity at 0.65x is still significantly below the targeted level of 2.33x.

Risks to our thesis include unexpected losses from its associates and changes to the current incentive-based regulations and imbalance costpass through arrangement

Source: Affin Hwang Research - 2 Mar 2020