KEY INVESTMENT HIGHLIGHTS

• 1H20 core earnings disappointed

• Core earnings down 45%ytd; regulated earnings intact, but dragged by non-regulated segments.

• ‘Gap year’ between RP2 and RP3 approved by regulators, underpins near-term regulated earnings visibility.

• Earnings cut by 18%/6% for FY20F/21F to reflect unplanned plant outages, higher MFRS16 impact, mainly.

• Maintain BUY at lower TP of RM13.10; significant share price retracement presents value, coupled with reasonably attractive yields

Weak 2Q20. Tenaga reported a core net profit of RM598m for its 2Q20, bringing 1H20 core earnings to RM1.7b. This was weaker than expected, accounting for just 38% and 32% of our and consensus’ FY20F respectively. An interim dividend of 22sen/share was declared, representing a 73% payout against 1H20 core earnings.

Regulated earnings intact, dragged by non-regulated segments. Tenaga’s 1H20 core earnings fell 43%ytd. The group’s regulated earnings remained intact in 1H20 at RM2b vs. RM4b estimated for FY20F. However, overall group earnings were dragged by: (1) Manjung Unit 2 & KEV outages in 1Q20 – estimated RM100m impact to capacity payment (2) Manjung 5 outage which partially impacted June up till 5th August (3) Reduction in subsidiary (manufacturing units) earnings by RM237m due to the lockdowns (4) Losses at the retail segment of RM118m – retail operates on a price-cap basis, hence was impacted by lower demand as well as unusually high tariff band for domestic segment during the MCO (5) Lower capital allowance of RM219m given delays in capex rollout during the MCO (6) Higher MFRS16 impact of RM296m.

Plant outages. Manjung Unit 2 and KEV plants suffered from outages, resulting in capacity payment being negatively impacted by RM100m in 1H20. Both the plants have been out since3Q-4Q19 and was back online from Feb20. Another forced outage came from Manjung 5, estimated to have partially impacted from June all the way up till August 5th.

Retail dragged by higher provisions, mainly. The retail segment suffered a loss of RM118m in 1H20. This was mainly due to significantly higher allowance for doubtful debt (ADD) in 1H20, taken as a prudent measure in view of the Covid19 pandemic’s potential impact on Tenaga’s customers. While 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. Nonetheless, Tenaga is understood to be in negotiations with the Energy Commission (EC) to renegotiate the levels of ADD allowable for FY20F and for a clawback of the exceptionally high amount this year via regulatory adjustments.

Source: MIDF Research - 1 Sept 2020