Investment Highlights

• We maintain our forecasts and BUY rating on Tenaga Nasional (TNB) with an unchanged DCF-based fair value of RM11.50/share (WACC: 7%, terminal growth rate: 2%).

• TNB is expected to spend RM35bil over 5 years to upgrade the national grid. This will entail transforming the grid to a smart one, whereby technology or systems would be used to control the grid. The upgrading works are envisaged to commence in FY25F.

• In spite of the heavy capex of RM35bil to upgrade the grid, we reckon that TNB would still be able to maintain its dividend payout of 30%-60% of normalised net profit in the future. This is due to TNB’s healthy annual free cash flows of more than 50 sen per share. For FY24F, we forecast a gross DPS of 45 sen for TNB, which implies a yield of 4.5%.

• Proposals for RP4 (Regulatory Period 4), which will take effect from 2025F to 2027F, will be submitted at the end of this year. The parameters for RP4 such as base tariff and WACC will be announced at the end of FY24F.

• Under RP3 (2022 to 2024F), TNB’s WACC is 7.3%, which is the same as RP2. We believe that WACC cannot be too low as there would be no incentive for TNB to invest in capex. TNB’s regulated asset base is estimated to be RM70.8bil at the end of FY24F.

• TNB plans to achieve a RE capacity of 14,300MW by 2050F (as of June 2023: 3,922MW). The group has 3 flagship projects in the pipeline. These are:
  (1) large scale solar parks in 5 sites with a capacity of 100W each,
  (2) hybrid hydro-floating solar at existing dams with a total capacity of 2,500MW, and
  (3) co-firing of hydrogen and ammonia at some of TNB’s power plants.

• Presently, the bulk of TNB’s RE portfolio consists of hydro power. Out of the RE capacity of 3,922MW, hydro accounts for 72.2% while solar makes up another 20.3%. Wind power accounts for another 7.1% of TNB’s RE capacity while biomass and biogas make up the balance 0.4%.

• TNB is currently trading at an attractive FY24F PE of 13x, which is lower than its 2-year average of 15x, together with appealing dividend yield of 4.5%.

Source: AmInvest Research - 17 Oct 2023