KEY INVESTMENT HIGHLIGHTS

• FY19 results disappointed

• 4Q19 earnings dragged by unplanned outages, restructuring cost and higher finance cost from Jimah East commissioning

• 50sen/share special dividends declared; RM1/share total dividends is a record

• FY20F/21F earnings revised lower by 9.7%/10.3%

• Maintain BUY albeit at a lower TP of RM13.80; significant share price retracement presents value, coupled with reasonably attractive yields

FY19 disappointed. Tenaga reported core net profit of RM477m for its 4Q19, which brought FY19 core earnings to RM4.7b. This is short of both our and consensus estimates accounting for 90% and 85% of FY19 forecasts respectively.

Key takeaways from 4Q19. For 4Q19, Tenaga’s earnings were hit by several factors: (1) Unplanned outages at its Janamanjung and Kapar (KEV) plants (2) one-off costs on the group’s reorganization exercise and write-off of PPE for Paka decommissioning (3) higher interest cost from the commissioning of Jimah East – Unit 1 in mid-FY19 and Unit 2 in Dec19.

Unplanned outages. The unplanned outages at Unit 2 of Tenaga’s Janamanjung plant and Unit 6 of the KEV plants affected capacity payment by up to an estimated RM300m. The former was out for ~120 days while the latter was out for 151 days. Positively, the issues have been resolved and both units have been up and running from Feb20 and Jan20 respectively.

Record dividends. Tenaga announced a final dividend of 20sen/share and on top of this, a special dividend of 50sen/share, which brings FY19 total dividends to a record RM1/share. This is a generous 125% payout and translates into an attractive yield of 8.3%. At this juncture, Tenaga is still sticking to its 30%-60% payout policy, though notably, generation capex should start to ease given slowing plant-up programs (for conventional power plants) in the near-to-mid-term.

Impact from stimulus package. The 15% discount on electricity tariff for a period of 6 months (estimated at RM30m-RM40m) will be fully funded by the Electricity Industry Fund (EIF) and has no impact on Tenaga’s earnings. The acceleration of RM2b capex form future years (from the original RM11b) will translate into higher regulated asset base (RAB), but earnings accretion from this has yet to be finalized with the regulators. Overall however, the larger RAB should be a positive for Tenaga.

Earnings revision. Given the weaker than expected results, we trim our FY20/21F by 9.7%/10.3% respectively. Despite the cut, we expect Tenaga’s FY20F to recover by 10% given absence of the one-off restructuring costs and assuming no more unplanned outages in FY20F.

Source: MIDF Research - 2 Mar 2020