Tenaga Nasional (TNB)’s net profit declined 54% YoY in 1QFY20 to RM718m, mainly dragged by unrealized forex loss of RM388m. Excluding that, its 1QFY20 core net profit was RM1.1bn (-33% YoY), broadly in-line with our and consensus’ full-year estimates, accounting for 23% and 21% respectively. Lower YoY net profit was also due to higher allowance for doubtful debt for its retail business amounting to RM99.1m, in anticipating of slower collection from the impact of challenging economy owing to Covid-19 pandemic. Electricity demand in 1QFY20 declined 2% YoY as movement control order (MCO) was implemented from 18 March 2020. Despite that, new peak demand was recorded at 18,808MW on 10 March 2020. We maintain our Neutral call on TNB, with unchanged target price of RM13.28.

• Lower revenue due to ICPT rebate. Revenue for 1Q20 dropped by 12% YoY to RM11.6bn owing to imbalance-cost-pass-through (ICPT) rebate of RM307.5m due to lower fuel costs (i.e. coal and gas prices), compared to ICPT surcharge of RM1.37bn in 1Q19. Electricity demand during the quarter declined by 2% YoY, with Industrial sector falling by 7.5% YoY, but partially offset by higher demand from Domestic sector (i.e. Residential) at 5.8% YoY. Overall electricity consumption for the year is expected to drop between 7-15% YoY, mainly due to slower activities in the Commercial sector, owing to Covid-19 pandemic and implementation of MCO.

• Core net profit (-33% YoY, +170% QoQ). For 1Q20, total operating expenses decreased by 10.6% YoY to RM9.5bn mainly due to lower energy payment to independent power producers (IPPs) (-32%) as a result of lower fuel prices (Figure 2). Nevertheless, higher provision of doubtful debt amounting to RM99.1m was made under its Retail business as it anticipates higher challenges on collection due to Covid-19 impact. Finance cost was also higher in 1Q20 (+27.5% YoY) due to new coal plant of Jimah East Power (JEP). Overall, its core net profit declined 33% YoY to RM1.1bn.

• Outlook. Despite slower electricity demand for the year, earnings of its regulated revenue cap entities (Figure 4) are guaranteed at demand growth of 1.8%-2% as stipulated by the IBR for second regulatory period (RP2: 2018-2020). Hence, we believe earnings will remain intact in FY20F. TNB will also continue to honour its dividend policy of 30% to 60% of dividend payout ratio based on PATAMI (excluding extraordinary and non-recurring items). TNB also highlighted that it continues to review performance of its 30%-stake in GMR Energy, India, which is currently under a restructuring exercise. To note, GMR has a remaining book value of RM450m as at Dec 2019. We also understand that TNB is currently proposing to the Energy Commission (EC) to defer RP3 by another year (initially should start in 2021) by using the terms of RP2 (Figure 5), to allow for stable market and better assumptions.

Source: PublicInvest Research - 11 Jun 2020