3QFY20 missed forecast again as the COVID-19 impact on non-regulated business persisted and, in our view, this will continue until the pandemic is over. However, we remain optimistic given the earnings resiliency for its regulated business. Post-earnings cut, its valuation remains attractive at 12.9x with decent c.4% yield. We continue to rate the stock an OP with a lower TP of RM12.40.

3QFY20 missed forecast yet again. 3QFY20 results came below expectations although core profit surged 51% QoQ to RM903.0m as 9MFY20 core profit of RM2.50b only made up 56%/57% of house’s/street’s FY20 estimates. This was because the COVID-19 impact of RM703.8m on its non-regulated business plus sales discount and contribution in 2QFY20 was not one-off but continued into 3QFY20 albeit with a smaller quantum of RM425.8m. No dividend was declared as it usually pays half-yearly dividends historically.

COVID-19 continued to impact… 3QFY20 core profit jumped 51% QoQ from RM597.8m in the preceding quarter as the quantum of COVID-19 impact mentioned was smaller. The core earnings were partly adjusted for RM51.6m impairment for its Indian unit GMR. Meanwhile, it had fully recognised the RM250m commitment for the sales discounts for Apr-Sep. Operationally, overall Peninsular electricity demand leapt 12.3% QoQ after a 8.4% decline in the MCO-affected 2QFY20 but it was still 1.7% YoY lower and this was covered by c.RM27.8m revenue cap. Although fuel cost dipped slightly by 1%, total opex rose 5% to RM9.56b as general expenses jumped 58% or RM197.7m. The fall in fuel cost was attributed to average coal price which contracted 14% to RM229.8/MT while average reference market price for gas/LNG fell 4% over the quarter.

… but regulated business still resilient. YoY, 3QFY20 and 9MFY20 core profits plummeted 31% and 42% from RM1.30b and RM4.31b, respectively, primarily due to the abovementioned COVID-19 impact. Electricity sales in Peninsular fell 3% YoY and 6% YTD over the same periods as demand slid 1.7% and 6.2%, respectively. As such, there was a total of RM533.3m revenue cap adjustment in 9MFY20 to make up the demand short-fall which will not affect TENAGA’s earnings under the IBR framework. On another key pass-through element, total fuel cost declined 26% both in 3QFY20 and 9MFY20 which brought overall total opex down by 10% and 12%, due to average coal price falling 24% from RM301.9/MT and 23% from RM337.6/MT, respectively.

COVID-19 impact will linger in the immediate term. Our previous assumption of a one-off impact solely in 2QFY20 seems to be too optimistic. We are now expecting another RM300m in 4QFY20 and RM500m in 1HFY21. This effectively reduced our FY20-21 estimates by 17%-9% with NDPS cut proportionally based on unchanged 50% pay-out. Nonetheless, we remain optimistic on its earnings prospects post-COVID pandemic as its earnings resiliency remains high.

Valuation still attractive; reiterate OUTPERFORM. Despite near- term earnings dip on COVID-19 impact, we still like the stock for its earnings resiliency over its regulated business and as the COVID-19 impact will subside once the pandemic is over. Given near-term earnings concern, we now tag -1SD to its 3-year PER mean of 14.5x to derive new target price of RM12.40 from RM13.95 which was based on 3-year mean of 14.9x. Even after the earnings cut, it still trades at attractive 12.9x FY21 PER with decent yield of c.4%. OUTPERFORM maintained. Downside risk to our recommendation is weaker-than- expected earnings from non-regulated business.

Source: Kenanga Research - 27 Nov 2020