TNB to see rebound in 2H20 on strong regulated earnings


TENAGA Nasional Bhd’s (TNB) earnings are expected to rebound in the second half of 2020 (2H20), after the utility group posted a 41.5% drop in second-quarter (2Q) net profit due to higher tax expenses and weaker electricity sales.

TNB recorded a net profit of RM653.3 million in the 2Q ended June 30, 2020 (2QFY20), versus RM1.12 billion last year. Revenue slid 15.5% to RM10.89 billion from RM12.88 billion the year prior, as business activities slowed amid Malaysia’s pandemic containment measures.

Yet, the utility company’s major earnings stream remains intact, said Hong Leong Investment Bank Bhd (HLIB) analyst Daniel Wong in a recent note.

This comes as the revenue cap framework guarantees earnings at demand growth of 1.8% to 2% (transmission and distribution) and power purchase agreement/ service level agreement structure guarantees capacity payments (power generations).

“Nevertheless, its retail segment (under price cap) and other subsidiaries (including Sabah Electricity Sdn Bhd, GSPARX Sdn Bhd and TNB Repair and Maintenance Sdn Bhd) were affected by the Movement Control Order (MCO) in 1H20 due to lower power demand, stop work order and lower demand.

“On the brighter side, management guided power demand has seen upticks and job orders have resumed since the implementation of the Recovery MCO in June, resulting in earnings rebound in 2H20,” Wong said.

The government has also agreed to TNB’s proposal to introduce a “gap year” in 2021, between the end of Regulatory Period 2 (RP2) in December 2020 and the start of RP3, which is expected to be implemented for the 2022 to 2024 period.

This is to better assess various factors including power demand, fuel costs, equity risks and bad debts, among others, in setting RP3 terms.

HLIB maintained its ‘Buy’ call on TNB, with a lower target price (TP) of RM12.50 from RM13.20 previously.

MIDF Amanah Investment Bank Bhd also kept its ‘Buy’ recommendation on the stock with a revised TP of RM13.10, against RM13.70 previously.

“Dividend yields of 3.3% to 4% (FY20 to FY21) are reasonably attractive in the current low bond yield environment, underpinned by easing capital expenditure for generation in the near-to-midterm, which suggests base dividends of at least at the higher end of the group’s 30% to 60% payout policy; and stretched government fiscal position suggests potentially higher cash upflow requirement from key government-linked companies,” MIDF analyst Hafriz Hezry said in a report.

He added that TNB’s regulated earnings are largely insulated as revenue cap entities’ earnings are guaranteed at a demand growth of 1.8% to 2% per annum under RP2.

AllianceDBS Research Sdn Bhd maintained a ‘Hold’ call on TNB, with a lower TP of RM11.10 from RM12.90.

“We are positive on TNB’s internal reorganisation plans, but expect the positive impact on earnings to only filter through gradually,” AllianceDBS analyst Siti Ruzanna Mohd Faruk stated in a note.

Following TNB’s internal reorganisation, the research firm expects to have better clarity of earnings from the separated power generation business and electricity retail business.

In its Bursa Malaysia filing last Friday, TNB said it anticipates a gradual recovery in performance for the 2H20, in line with the reopening of the domestic economy and the government’s economic stimulus measures.