Outperform Reiterated on Tenaga Following MESI 2.0 Masterplan

Date: 18/09/2019

Stock  :  TENAGA       Price Target  :  15.80      |      Price Call  :  BUY
        Last Price  :  13.64      |      Upside/Downside  :  +2.16 (15.84%)

Recently, the Cabinet has approved a 10-year Malaysia Electricity Supply Industry (MESI) 2.0 masterplan to reform the Malaysia’s domestic power industry and the details were announced yesterday. Following this, Macquarie Equities Research (MQ Research) released a report on Tuesday (17 Sept), summarising key initiatives of MESI 2.0 and their implications while maintaining an Outperfom rating on Tenaga.


  • MQ Research reiterates an Outperform recommendation on Tenaga following news reports detailing the Malaysia Electricity Supply Industry (MESI) 2.0 masterplan. For Tenaga, MESI 2.0 will see 1) it remaining the (sole) transmission and distribution asset provider with Third Party Access (TPA) rules drawn up; 2) enhanced governance around ring fenced entities, i.e., Grid System Operator and Single Buyer, starting in 2021; and, 3) steps to be introduced increasing retail competition. These are well within expectations and, in MQ Research’s view, should mitigate the risk perceptions weighing over Tenaga’s shares which trade at an undemanding 13x core 20E price-to-earnings ratio (PER).
  • MQ Research summarises below the key initiatives of MESI 2.0 and their implications.


  • Opening up of procurement for gas and coal. Plan to allow independent power producer (IPPs) (including Tenaga) to procure fuel from third parties - currently Tenaga Fuel (coal) and Petronas (gas). Negative to Tenaga Fuels’ profits but this is insignificant to Tenaga’s profits (<1%) on our estimates. Negative for Petronas, if generators are able to drive down gas prices. More active hedging of fuel.
  • Establishing hybrid generation market. New IPPs no longer on long term (21-25 year) Power Purchase Agreements. Changes to existing rules to allow IPPs selling excess capacity to the grid to cover capacity costs. Net negative to IPPs as internal rate of return (RRRs) are likely to be reduced. Increased risk sharing.
  • Enabling third party system (TPA) to grid. Reforms to allow TPA to be tabled by end 2022 with interim steps to allow green-based energy TPA by 2020. The current incentive-based regulation (IBR) already accounts for different costs of the transmission and distribution networks. MESI 2.0 will establish the rules for participation. Neutral to earnings under IBR.
  • Facilitating choice in retail. Pilot opening of retail by 2Q 2021 with expectation of industry taking up to 2029 for a gradual price-based retail market. Risk to Tenaga’s RM20m of consumer service profits.
  • Increasing transparency and reducing conflict of interest in Single Buyer and Grid System Operator. Plan for an enhanced governance on ring-fenced entities to be implemented by 1Q 2021. MQ Research expects this to ultimately see the removal of the ring-fenced entities from Tenaga, which would once and for all remove fuel costs related risk perceptions on Tenaga.

Action and Recommendation

  • Outperform reiterated.

12-month Target Price Methodology

  • TNB MK: RM15.80 based on a PER methodology

Source: Macquarie Research - 18 Sept 2019

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