Friday 29 Mar 2024
By
main news image

KUALA LUMPUR (June 10): Tenaga Nasional Bhd’s disappointing results in the first quarter ended March 31, 2020 (1QFY20) may be a prelude to a tough FY20 in the face of economic uncertainties triggered by the COVID-19 outbreak.

The group has already suffered the brunt of a weak ringgit in 1Q20, and has cautioned of lower electricity demand this year by up to 15%.

Furthermore, analysts have raised another potential downside risk on its earnings - growing receivables as customers delay or fail to pay electricity bills promptly due to the tough operating environment.

Weak ringgit eats into profit

TNB’s net profit in 1Q20 of RM717.9 million or 12.62 sen per share makes up a mere 13.64% of its FY20 EPS consensus estimate of 92.5 sen. Revenue fell 12% to RM11.65 billion from RM13.24 billion.

Net profit in 1QFY21 slid 54.5% from RM1.55 billion a year ago, dragged mainly by a swing to forex loss of RM402.8 million, from a gain of RM207.5 million, caused by a weaker ringgit against the US dollar and the Japanese yen.

In the quarter under review, the ringgit averaged 4.1757 against the greenback as opposed to 4.0912 in 1QFY19.

On forex exposure, TNB has RM8.34 billion or 17.6% of its borrowings in US dollar while RM2.47 billion or 5.2% is in Japanese yen.

The utility giant has operations in the Middle East, India, Indonesia, the United Kingdom and Pakistan.

The group hedges a minimum of 50% of known foreign currency exposure up to a 12-month period, it said in its latest annual report.

Moving on, the Malaysian ringgit has weakened to the 4.30-mark against the US dollar in April and May as opposed to the average of around 4.1470 in 2QFY19.

At the time of writing, the ringgit traded at 4.2520 against the greenback. Some are seeing the ringgit gaining momentum towards year-end on the reopening of the economy and better visibility of economic growth, although volatile oil prices will be a wild card.

Potential bad debt provisions ahead

The bulk of TNB’s business in Malaysia is insulated from demand risk, due to the revenue-cap model for its core business of transmission and distribution.

For FY20, regulator Energy Commission expects TNB’s transmission and distribution business to generate profit of RM3.97 billion, according to analysts.

Compensation to offset revenue shortfall below the benchmark will come in later, in the form of higher tariffs or compensation via the Kumpulan Wang Industri Elektrik (KWIE) fund. This leaves TNB with risk of cash flow squeeze for the year.

Another RM360 million or 8% of its FY19 profit, which comes from the generation segment, is protected by service level agreements (SLAs).

However the revenue cap model and the SLAs do not protect TNB from risk of bad debt provision, arising from customers delaying or failing to pay their electricity bills.

This is especially true for industrial and commercial customers, said TA Research analyst Kylie Chan Sze San, considering tightening cash flow of businesses due to the impending economic slowdown.

“We do not discount the possibility that TNB may need to recognise impairments on receivables for delinquent accounts,” said Chan in a note dated May 14.

“Furthermore, in the worst-case scenario, TNB may need to write-off these non-paying accounts if customers turn insolvent,” Chan added.

In the whole of 2019, TNB sold 123,252 GWh electricity in Malaysia, with its largest customers led by the industrial (38.6%), followed by commercial (34.8%) and domestic (23.6%)sectors.

In the first quarter, TNB electricity sales in Peninsular Malaysia slid 1.87% to 27,938.2 GWh or RM11.78 billion from 28,471.1 GWh or RM12.03 billion previously.

The second quarter demand will be skewed by the March-June Movement Control Order (MCO), where TNB said industrial and commercial sectors electricity usage dropped 25%-50% as most offices, malls, hotels, businesses, and factories shut down while domestic sector usage surged 20%-50%.

A ballpark figure would put TNB’s 2Q20 electricity sales in Peninsula Malaysia to around 22GWh or between RM9 billion-RM9.5 billion.

Prior to the results announcement, the KLCI component stock had 16 buy calls, versus 6 hold calls and one sell call, with a consensus target price of RM13.77.

The investing community would be on close watch whether there would be any downgrade on the utility giant.

      Print
      Text Size
      Share