Tenaga (TNB) reported a lacklustre set of 1Q20 results; core PATAMI of RM1,222m (-25% yoy) is largely in line with our and consensus forecasts: 22% and 23% of full-year estimates respectively. There were no major surprises, apart from the higher-than-expected allowance for doubtful debts for its retail segment during the quarter. Despite the contraction in demand, overall profitability remains intact. We raise our TP to RM12.10, and upgrade our rating to HOLD from Sell, as we lower our risk premium.

Contraction in Demand Not a Concern

Although management is guiding that demand could contract by around 7% yoy for 2020, we believe that the overall profitability should remain relatively unchanged, as the revenue cap entities are guaranteed a demand growth of 1.8%-2.0% yoy under Incentive Based Regulation (IBR) for Regulated Period 2 (RP2). The biggest current concern for management is on collection, as there was a large drop in overall collections in April (-36.4% yoy) and May (-29.9% yoy). Although under the IBR there is an allocation for bad debts, the allocation for doubtful debts of RM99.1m in 1Q20 is already above the threshold.

Cash Flow Is Still Intact

Despite the drop in collections, we believe that TNB is still able to operate and sustain their current capex plans, as they were able to draw down RM1bn of new debt to help fund their working capital. Management also indicated that they are committed to their current dividend payout policy, which is equivalent to 30%-60% of their PATAMI. Positively surprising, TNB has also suggested to the Energy Commission to delay the implementation of RP3 to 2022 instead of the planned 2021, to normalise the impact from COVID-19, and the “gap” year return should remain at 7.3% similar to RP2.

Upgrade to HOLD With a Higher TP of RM12.10

We have revised our EPS forecast by 2-3.3% for FY20-22E to factor in the current performance. However, we have raised our DCF-based TP to RM12.10 as we roll forward our valuation base, and also reduce the risk premium for TNB. Due to the limited downside risk, we also upgrade the stock rating to HOLD from Sell. Risks to our thesis include higher-/lowerthan-expected losses from its associates and changes to the current IBR/ICPT.

Source: Affin Hwang Research - 11 Jun 2020