• We believe that Tenaga’s (TNB) performance was below both market and our expectations, as 1H20 core-PATAMI of RM2.0bn (-35% yoy) only constituted 40% and 37% of the respective full-year forecasts
• The weaker-than-expected performance can be attributed to the loss of profit related to COVID-19 which amounted to RM574m. We believe some of the losses are unlikely to reoccur in the coming quarters
• We have cut our EPS forecasts for FY20-22E by 2.6%-15.4% to factor in the lower profitability, but raised our DCF-based TP to RM12.80, and upgrade our call to BUY from HOLD

Underestimated the Impact of COVID-19

We believe that the weaker-than-expected performance of TNB was due to the street and us underestimating the loss of income related to the impact of COVID-19. TNB’s management shared that the loss of income related to COVID-19 was around RM547m in 1H20, excluding its CSR contribution of RM148m, and most of the losses were related to its retail operation. Some of the losses are likely to occur again in 2H20, but we believe that the overall quantum is likely to be lower than in 1H20. Apart from the losses from COVID-19, its generation business also recorded a lower profit, mainly due to the unplanned outage of one of its power plants, which cost TNB around RM48m in capacity payment in 1H20 but it was already operational by 5th Aug.

Potential Special DPS by End of the Year

Given the weak 1H20 performance, it did not come as a surprise to us that DPS for 1H20 was lower at 22sen, from the 54.5sen in 1H19. On a positive note, TNB has increased the dividend payout to 59% of adjusted profit (54.5% in 1H19), which is at the higher end of its dividend payout policy of 30-60% of its adjusted net profit. Management has also guided that the focus during 1H20 was to ensure sufficient liquidity, but will be reassessing the balance sheet again by end of the year, which could lead to a higher payout via a special dividend by year-end to help match the DPS of 2019. The government has also agreed to postpone the implementation of RP3 to 2022 from 2021.

Back to Normal, Upgrading to BUY With a Higher TP at RM12.80

We cut our EPS forecast for FY20-22E by 2.6%-15.4% to factor in the latest performance, but upgrade the stock to BUY (from Hold) with a higher DCF-based TP at RM12.80 (from RM12.10), as we lower our WACC assumption. We believe that the decision to increase pay-out (with special DPS) is likely to be the re-rating catalyst for TNB. Downside risk to our call are: 1) Significant lower return on RP3, and 2) Higher cost structure.

Source: Affin Hwang Research - 1 Sept 2020