Despite a strong recovery by 45% QoQ, 1QFY21 net profit of RM60.4m still came below expectation on planned outages which boosted O&M costs higher for TBE and TBP, and lowered water and energy payments affecting associates’ income. Having said that, we still expect a better FY21 as FY20 was hit by forced outages in 2HFY20. We continue to rate the stock an OP for its attractive >5% yield with unchanged TP of RM1.05.

1QFY21 missed forecasts. Despite earnings rising 45% sequentially, 1QFY21 net profit of RM60.4m still came below expectations which only made up 19% of both our as well street’s full-year FY21 estimates. This was largely due to: (i) higher O&M costs for planned outages and lower fuel margin at TBE and TBP, and (ii) lower associates’ income as planned outages hit water and energy payments for Shuaibah and HPC plants. No dividend was declared as expected as it usually pays half- yearly dividend.

Sequential results improved on lower opex… QoQ, 1QFY21 net profit jumped 45% to RM60.4m from RM41.6m in the preceding quarter, despite an 11% contraction in top-line as energy payment declined 21%. The improved results were largely attributed to lower opex by RM26m on lower administrative and other opex such as provision for advisory fees and lower start-up costs. Overall, capacity payment inched up slightly by 1% as TBE rose 8% given that there was an unplanned outage in 4QFY20. Meanwhile, associate income fell to RM27.8m from RM30.7m owing to lower income from Shuaibah and HPC plants as mentioned above while net profit for Alam Flora fell to RM17.9m from RM22.6m.

…higher O&M costs weighed on yearly results. However, 1QFY21 net profit contracted 32% YoY from RM89.2m while revenue plummeted 24% to RM1.35b from RM1.77b a year ago. The decline in earnings was primarily driven the abovementioned higher O&M costs for planned outages and lower fuel margin for a total of RM23m for TBE and TBP plants as well as the lower associates’ income by 32% or RM13.0m, which were hit by planned outages at Shuaibah and HPC plants. However, earnings for Alam Flora jumped 21% from last year to RM17.9m.

Still more stable earnings in FY21 as FY20 results were hit by unplanned outage at TBE in 2HFY20. On the other hand, 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 FY21 earnings slightly by 8% to reflect higher O&M costs and lower associates’ income imputing 1QFY21 results, and implement 2% downward fine-tuning for FY22 forecast. Accordingly, FY21-FY22 NDPS are adjusted correspondingly based on unchanged 80% payout assumptions.

Maintain OUTPERFORM with unchanged target price of RM1.05, which is based on 20% holding company discount to its SoP of RM1.31. Our recommendation is premised on its attractive valuation coupled with above average dividend yield of >5%. Risk to our recommendation is unplanned outages leading to lower-than- expected earnings.

Source: Kenanga Research - 20 May 2021