• Keep NEUTRAL and MYR9.00 TP with 0% upside, c.5% yield. 1H22 core profit was within our expectations. Earnings were down 15% YoY due to weaker contribution from power generation, higher tax expenses, and Malaysian Financial Reporting Standards 16 (MFRS 16) net movements. West Malaysia electricity demand continued to recover in 2Q22 (+4% QoQ), led by better commercial and domestic consumption, while operating cash flow remained under pressure (-31% QoQ) from the continued spike in trade receivables (+36% QoQ).

• At 45% of our and Street’s FY22 estimates, Tenaga Nasional’s 1H22 core profit of MYR2bn (-15% YoY) was within our expectations. Note that our numbers have imputed MFRS 16’s movements (1H22: -MYR474m, 1H21: -MYR286m). A 20 sen interim DPS was declared, implying an adjusted payout ratio of 47% (2Q21: 22 sen).

• 2Q22 revenue up 22% QoQ on higher electricity sales (+4%; led by domestic and commercial consumption) and imbalance cost pass-through (ICPT) surcharge recovery. Core earnings rose 25% QoQ on lower tax expenses. Despite revenue rising 46% YoY on significantly higher ICPT recovery and electricity demand (+6%), 1H22 core earnings fell 15% YoY on higher tax expenses, weaker generation profit, as well as higher tax deferred and MFRS 16 net movements (seen from higher finance costs and depreciation charges).

• Steady demand growth. West Malaysia electricity demand continued to recover in 2Q22 (+4%; on better commercial and domestic consumption). Overall demand is projected grow 1.7% YoY in 2022. Note that generation cost continued to spike in 2Q22 (+28% QoQ) on higher gas and coal prices. We also saw an increase in coal generation mix (2Q22: 58%, 1Q22: 54%) with lower gas generation mix (37%). 2Q22 operating cash flow declined by 31% (with the continued rise in trade receivables; +6% QoQ to MYR19bn) totalling MYR1.9bn (-79% YoY) in 1H22. Net gearing rose to 0.84x in 2Q22 from 0.78x in 1Q22. We were guided that MYR5.8bn fuel subsidy for 1H22 was split into monthly payments in 2H22. With fuel prices still high, we believe operating cash flow will remain under pressure. If the Government keeps tariff rates unchanged in 1H23, a much higher fuel subsidy will be required to close the gap. Current RE capacity stands at 3.8GW (16% of total capacity) including the recently commissioned 180MW Bajoli Holi hydro power plant in India. This is still lagging behind its 8.3GW target by 2025, which suggests more aggressive M&A in this segment going forward.

• Maintain earnings estimates and TP, with a 4% ESG discount based on TNB’s ESG score of 2.8. Foreign shareholdings stood at 12.1% as of Jun 2022 (Dec 2021: 12.1%). Downside risks: Higher operating costs and higher-than-expected plant outages.

Source: RHB Research - 1 Sep 2022