• Tenaga’s (TNB) 9M20 core-PATAMI of RM3,212m (-25.5% yoy) is below our expectation but within consensus, delivering 71% and 73% of the respective forecasts
• The loss of earnings due to COVID-19 in 3Q was RM91.3m, which was significantly lower than in 2Q, while total losses for 9M20 stood at RM665.3. We are not expecting TNB to recoup all the losses in the coming quarters
• We are maintaining our 12-month TP at RM12.80, and our BUY call, as the improved collection increases the likelihood for a special dividend

Still feeling the impact of COVID-19, but becoming more manageable

TNB’s profitability continued to be negatively impacted by COVID-19, as the loss of income related to it has widened to RM665.3m for 9M20, although the increase has slowed to RM91.3m in 3Q20. The bulk of the loss was due to higher provisions for doubtful debt (above the allowable amount in the IBR) and a lower capital allowance resulting from the delay in the progress of the regulated asset projects. Given that there is an improvement in the collection, we expect the loss of income to narrow in the coming quarters despite some states having been put under the Conditional Movement Control Order (CMCO). TNB is still in discussion with the government to recoup some of the losses due to the higher bad debts, but we have not included this into our forecast.

We are still waiting for a higher payout for 2020

As the monthly collections have improved significantly since Apr (after the MCO), we believe that TNB is in a better position to distribute higher dividends, given that the current balance sheet remains healthy. Although debt has increased by RM5.6bn since the beginning of the year, RM1.5bn of it was due to the consolidation of Vortex as Tenaga had increased its stake (Vortex is now a subsidiary, not an associate), and the RM1bn raised earlier in the year was a precautionary measure in case TNB faced a liquidity problem during the MCO in 1Q20. While TNB has around RM4.2bn of debt due in the next 12 months, management reckons that the company has sufficient lines to cover it.

Maintain BUY with an unchanged TP of RM12.80

We trim our EPS forecast for FY20-22E by 0.1%-4.0% to factor in the latest performance. We also keep our BUY call and TP at RM12.80 unchanged, as we believe that the decision to increase its dividend pay-out (with a special DPS) is likely to be the re-rating catalyst for TNB. Downside risk to our call are: 1) a significantly lower return on RP3, and 2) a higher cost structure.

Source: Affin Hwang Research - 27 Nov 2020