1HFY21 was a solid quarter with core profit of RM2.82b, on track with expectations, partly attributable to higher monsoon- driven hydro revenue. Meanwhile, we believe the COVID-19 hit last year is unlikely to repeat this year. Hence, we are still optimistic on its earnings resiliency while the heavy discount on ESG concerns could be overdone. Thus, our call remains an OP with TP of RM11.76 and a decent >4% dividend yield.

2QFY21 matched expectations. At 58%/59% of house/street’s FY21 estimates, 1HFY21 core profit jumped 53% to RM2.82b, which we deem as inline given that the higher revenue generated from hydropower plant due to the monsoon season in 1HFY21 is unlikely to sustain owing to an energy payment cap quota annually for hydropower plant. It declared a first half-yearly NDPS of 22.0 sen in 2QFY21 which is the same amount as paid in 2QFY20.

A weaker sequential result… 2QFY21 revenue grew 8% QoQ to RM12.44b mainly due to a 8% hike in electricity sales in Peninsular on 0.7% demand growth while there was an ICPT under-recovery of RM314.6m as opposed to ICPT over-recovery of RM337.3m in the preceding quarter. However, core profit fell 9% QoQ to RM1.34b in 2QFY21 partly due to lower hydro generated revenue while other operating costs were higher by 10% such as a 21% jump in fuel cost as the main fuel coal price was 18% higher at RM379.8/MT from RM321.6/MT. This is also partly explained by ICPT under-recovery in 2QFY21 from ICPT over-recovery previously.

…but still a solid quarter. YoY, 2QFY21 core profit more than doubled to RM1.34b from RM636.4m, primarily due to 2QFY20 earnings being hit by the unprecedented COVID-19 which affected its non-regulated business by RM574m, lower contribution from generation business of RM129.8m, and sales discount and relief initiatives of RM148.0m. Demand growth bounced strongly by 9.6%. YTD, 1HFY21 core profit leapt 53% to RM2.82b from RM1.84b in 1HFY20, owing to the abovementioned COVID-19 hit in 2QFY20. Generally, total TNB fuel costs jumped 11% as coal price soared 27% to RM352.2/MT from RM277.9/MT which explained the sharp 96% decline in ICPT over- recovery to RM22.7m from RM522.4m previously.

Earning to normalise in 2HFY21, as higher hydro revenue in 1HFY21 is not sustainable. Meanwhile, there was no COVID-19 impact in 1HFY21 but we are expecting a small RM50m contribution in upcoming 3QFY21 for electricity discount under the PEMULIH package. Therefore, the COVID-19 impact which hit its FY20 results could be over. We have imputed RM500m charge of COVID-19 impact in our FY21 forecasts. However, we prefer to keep our FY21/FY22 forecast unchanged for now. Nonetheless, we remain optimistic on its earnings prospects post- COVID pandemic as its earnings resiliency remains solid.

Attractive valuation; reaffirm OP. Share price is still lacklustre given the ESG concerns but heavy selling is somewhat abating. The stock is currently trading at closer to -2.5SD to 3-year mean which we believe is unwarranted given its resilient earnings profile and heavyweight index stock status. And, it is working to address the ESG concerns. As such, we keep our OUTPERFORM recommendation with unchanged target price of RM11.76, which is embedded with an ESG discount, implying a valuation of -1.5SD to its 3-yer mean at FY22E PER of 12.7x. In addition, it also offers fairly decent yield of >4% based on regular payout. Downside risk to our recommendation is weaker-than-expected earnings from non-regulated businesses.

Source: Kenanga Research - 27 Aug 2021