FY20 core profit rose 20% to RM253.5m, missing expectations as the unplanned outage at TBE extended to 4QFY20. With the completion of the forced outage work, and KEV losses eliminated since 1QFY20, earnings volatility is fairly low here forth. At 80% of FY21 earnings payout assumption, the stock offers an attractive >6% yield. Thus, we continue to rate the stock an OP with revised TP of RM1.05.

4QFY20 disappointing. 4QFY20 result missed forecasts with core profit tumbling 18% sequentially to RM41.6m, totalling FY20 core profit to RM253.5m which came 26%/25% below house/street’s estimates, due to the continued unplanned outage at TBE, and RM19.0m or 38% decline in associate income. No dividend was declared during the quarter but we believe it would announce a final dividend once FY20 account is audited. Based on FY20A core EPS of 5.1 sen and 2QFY20 NDPS of 2.8 sen, assuming 80% payout, the final NDPS could be 1.3 sen for a total FY20 dividend of 4.1 sen against our earlier FY20 assumption of 5.5 sen. However, we believe the payout will be >100% eventually as it has been paying >100% in the past four FYs which potentially translates to NDPS of 5.1 sen for FY20.

TBE unplanned outages continued… Despite revenue rising 2%, 4QFY20 core profit fell 18% QoQ from RM50.8m in 3QFY20 largely due to the 38% decline in the abovementioned associate income while a lower taxation was recorded in the preceding quarter at effective tax rate of 10% vs. 31% in 4QFY20. However, EBIT improved 15% to RM186.7m given a less planned maintenance cost but overall earnings remained weak as opposed to 1HFY20 given the extension of unplanned outage at TBE to 4QFY20 from 3QFY20. On a positive note, Alam Flora’s net profit rose to RM22.6m from RM13m in 3QFY20.

…but better YoY numbers. With new Alam Flora’s earnings and 12% additional stake in Shuaibah coupled with the absence of KEV losses, YoY earnings improved by 57% and 20%, respectively, in 4QFY20 to RM41.6m and FY20 to RM253.5m. This is despite revenues contracting 12% and 15%, respectively, on the back of lower energy payments for SEV and TBP owing to lower despatch factor and drop in applicable coal price. However, energy payment has no impact on bottom-line being a pass through to off-taker. Meanwhile, associate income turned profitable to RM30.7m and RM171.8m in 4QFY20 and FY20, respectively, from share of losses of RM66.1m and RM21.6m with the absence of KEV losses and new 12% stake in Shuaibah as mentioned above. Meanwhile, Alam Flora contributed RM64.6m net profit to the group in FY20.

More stable earnings in FY21, as the forced outage work at TBE had already been completed in 4QFY20. With the elimination of KEV losses coupled with new earnings from Alam Flora and additional stake in Shuaibah, its forward earnings and dividends are more sustainable. Post results, we cut FY21E earnings by 11% to reflect FY20A results plus a higher base of O&M costs for scheduled maintenance while introducing our FY22 new forecast with earnings growth of 3%. FY21- FY22 NDPS are based on unchanged 80% payout assumptions.

Keep OUTPERFORM for its stable earnings prospects since their new assets came online and it also no longer equity account of KEV on top of an attractive yield of >6%. However, target price is reduced to RM1.05, which is based on 20% holding company discount to its SoP of RM1.32, from RM1.15 previously. Risk to our recommendation is unplanned outages leading to lower-than-expected earnings.

Source: Kenanga Research - 22 Feb 2021