Investment Highlights

• Looking at the ESG practices of our stock universe. In this report, we look at the ESG initiatives of the utility companies in our coverage. We find that TNB is the most ambitious in its RE (renewable energy) and carbon emission targets. This is not a surprise as TNB has a significant exposure to coal. YTL Power’s (YTLP) exposure to coal is via its 20% shareholding in PT Jawa, Indonesia while Mega First does not have any exposure to coal. More than 80% of Malakoff’s capacity payments are from coal power plants.

• TNB is the most ambitious. TNB plans to achieve RE capacities of 8,300MW post-2025F and 14,300MW in 2050F. The RE target of 8,300MW is about 45.6% of TNB’s installed generating capacity of 18,183MW. The group also plans to reduce its coal exposure by 50% by 2035F and 100% by 2050F. Malakoff’s target is to achieve a RE capacity of 1,400MW by 2031F. The RE capacity of 1,400MW is 26.2% of the group’s generating capacity of 5,342MW.

• Moving towards net zero in 2050F. TNB plans to reduce Scope 1 carbon emission intensity by 35% by 2035F from 2020’s levels. Malakoff’s target is to reduce GHG emission intensity by 30% in 2031F from 2019’s levels. Mega First plans to reduce GHG emissions in its supply chain by 50% and achieve carbon neutrality in 2035F. YTLP’s Wessex Water plans to be net zero in its operations in 2030F while YTLP Seraya plans to reduce GHG emissions by 60% in 2030F from 2010’s levels.

• Mega First faces risks of dust emissions and poor air quality. Mega First faces risks of dust emissions and poor air quality as explosives are used during the lime extraction process in the quarry. To mitigate the risks, Mega First monitors its air pollution control systems to ensure that they are within the emission limits set by the Department of Environment. Also, all the production lines are equipped with bag-house systems to remove pollutants from emissions. Mega First also conducts quarterly ambient air monitoring.

• Malakoff has the highest exposure to coal. Coal accounted for more than 80% of Malakoff’s capacity payments in 3QFY23. In terms of earnings however, we think that coal’s contribution is smaller as Alam Flora is estimated to account for 20% to 30% of Malakoff’s bottomline. Coal accounted for 24% of TNB’s revenue in FY22. T&D (transmission and distribution) assets generated a net return of RM4.5bil in FY22 and made up almost 80% of TNB’s net profit. YTLP Seraya, which owns 3,100MW of gas power plant in Singapore, generated the bulk of YTLP’s net profit in FY23. We estimate that PT Jawa (1,220MW coal power plant) accounted for 9% of YTLP’s net earnings in FY23.

• Coal exposure will decline when PPAs expire. We believe that there are about 12,000MW (installed capacity) of coal power plants in Malaysia currently. Based on the tenure of the PPAs, the earliest expiry is 2029F, which is 6 years from now. TNB plans to retire Kapar Power Plant in 2029F. Kapar has coal generating units of about 1,600MW. Malakoff's 2,100MW Tanjung Bin power plant (TBP) will expire in 2031F while the 1,000MW Tanjung Bin Energy (TBE) will expire in 2041F. We estimate that the expiry of Kapar, TBP and TBE will take out about 39% of coal capacity from the system. The other major coal power plants are TNB’s 3,100MW Janamanjung power plant in Perak and 2,000MW Jimah East in Negeri Sembilan, which commenced operations in 2019. The tenure of the PPAs is usually between 20 and 25 years.

• Coal to be replaced by gas power plants co-fired with ammonia/hydrogen. We think that it is difficult for solar or hydro to replace coal power plants due to intermittency and weather issues. Hence, we reckon that gas power plants co-fired with ammonia or hydrogen will replace coal power plants in the future. Currently, TNB is consolidating its findings with Petronas’ internal studies on the levelized cost of hydrogen. On the re-powering of the Paka power plant with hydrogen, the project is pending the completion of a joint feasibility study and the issuance of a Letter of Award by the government.

• Bulking up on renewable assets to reduce coal exposure, will take time. We believe that it would be a challenge to reduce coal exposure just by acquiring RE assets. This is because the size of RE assets is smaller than the capacity of existing coal power plants. Also, in the current environment of high interest rates and strong USD, we reckon that only companies with large balance sheet would be able to acquire assets.

Source: AmInvest Research - 20 Dec 2023