KEY INVESTMENT HIGHLIGHTS

• 1Q20 in line with ours but below consensus

• Core earnings lower year-on-year dragged by exceptionally higher provisions given pandemic impact on consumers

• Proposing a “gap-year” between RP2 and RP3

• Earnings tweaked slightly for stimulus contribution and conservatively assume no clawback of extraordinary provisions

• Maintain BUY, TP revised a tad lower to RM13.70 (from RM13.80); significant share price retracement presents value, coupled with reasonably attractive yields

Broadly in-line with our expectation. Tenaga reported a core net profit of RM1.1b (normalized for unrealized forex translation loss of RM388m) for its 1Q20. This is broadly in-line with our estimates but slightly below consensus at 21% and 19% of FY20F respectively. The results also included an exceptionally high provision for doubtful debt of RM99m.

‘Unrealized’ forex loss. The RM388m unrealized forex translation loss (vs. 1Q19 translation gain of RM264m) arises from the volatility of the Ringgit during the early part of the Covid19 outbreak and relates mainly to Tenaga’s USD debt. These are however, long-dated debt and has no impact on Tenaga’s immediate cash flows. USD debt makes up ~17% of Tenaga’s debt portfolio and overall foreign debt makes up ~24% (inclusive of JPY and GBP debt).

Higher provision for doubtful debt. 1Q20 core earnings were down - 15%yoy given exceptionally high provision for doubtful debt of RM99m in 1Q20. This was taken as a prudent measure in view of the Covid19 pandemic’s potential impact on Tenaga’s customers. While allowance for doubtful debt (ADD) is provided for as part of Tenaga’s regulated cost, the amount is capped based on the pre-agreed RP2 parameters, and is smaller relative to the actual amount that had to be taken given the extraordinary circumstances we are in currently. Nonetheless, Tenaga is understood to be in negotiations with the Energy Commission (EC) to renegotiate the levels of ADD allowable and for a clawback of the exceptionally high amount this year via regulatory adjustments.

Gap-year proposed. Tenaga is also proposing to the EC to have one “gap-year” between RP2 (which is ending Dec2020) and RP3 (which is supposed to commence from Jan2021). This is in order to get a better handle of the actual demand and fuel cost trends in setting RP3 parameters, and considering the “out of the ordinary” situation currently caused by the pandemic. Too much deviation against regulatory period parameters would cause a lot of fluctuation in ICPT movements. The “gap-year” is likely to continue on with RP2 parameters while regulated capex might incorporate some that has been planned for RP3.

Source: MIDF Research - 11 Jun 2020