• Tenaga’s (TNB) core-PATAMI of RM4,409m (+1% yoy) is within both our and consensus estimates, delivering 101% and 102% of respective forecasts. TNB also announced a total DPS payout of 80 sen for 2020.
• Despite a 8% qoq decline in EBITDA for 4Q20, core-PATAMI is flat qoq as TNB was able to recognised reinvestment tax allowance which was only gazetted end of 2021
• We reckon that with current cash flows, TNB should be able to sustain DPS payout of at least 70 sen over the next 2-3 years. However, we have downgraded the stock to Hold from BUY, due to lack of growth catalysts

Expect Better Earnings for 2021

With the recent completion of the 1,440MW Southern Power Plant and the absence of the loss of income due to the Covid19, we are expecting better quarters ahead for Tenaga. Given that the government has also agreed in maintaining the return for the regulated entities earnings at 7.3% for 2021, hence we are not expecting any decline in earnings for the regulated entities in 2021. Earnings contribution from the regulated entities in 2020 is around 55%. Apart from that, the government has also raised the allowance for regulated doubtful debt expenses to RM200m from the current RM94.3m, which would result in a lower cost structure for TNB.TNB provided RM325.9m for this in 2020.

Expecting Future Overall Payouts to be Above 60%

As the operating environment for Tenaga continues to improve, we reckon that there is a high possibility that Tenaga could continue with a special dividend for the next 2-3 years. The current official dividend policy for TNB is to payout 30-60% of their adjusted net profit as dividend. We believe TNB can sustain its capex needs even with a payout ratio of 75%. TNB’s DPS payout stood at 126% of their 2020 net profit. Although the government will be resetting the WACC for the regulated asset for RP3 starting in 2022, we are estimating a 25-30 bps cut from the current 7.3%, which we do not expect to have a significant impact on TNB’s cash flow.

Downgrade to HOLD With a Lower TP at RM11.05

We have cut our EPS forecast for FY21-22E by 12.1%-13.8% to factor in the latest results performance. We believe that TNB is committed to unlock the cash within its balance sheet, and the successful restructuring of its corporate structure could help expedite the process. However, due to the lack of growth catalysts in the near term, we are downgrading our call to HOLD with a lower TP of RM11.06 (from RM12.80).

Source: Affin Hwang Research - 1 Mar 2021