• Tenaga’s 9M23 was largely in line with our expectations at 71% of our fullyear forecast. We expect 4Q23 to be stronger on narrower fuel margins.

• The company added ~120MW of RE capacity in Australia during the quarter following the acquisition of Spark Renewables in September 2023.

• Reiterate Add rating with a DCF-based TP of RM12.00.

3Q23 Results Review

• Tenaga’s 3Q23 normalised net profit rebounded by 13% qoq on the back of more stable costs (following the sharp rise in overheads in the previous quarter), a slightly lower negative fuel margin of RM202m (vs. RM266m in 2Q23) and a lower effective tax rate of 17% (vs. 27% in 2Q23) due to higher capital allowance and reinvestment allowance claims.

• On a yoy basis, normalised net profit declined by 29% in 3Q23 and 20% in 9M23, mainly due to higher fuel costs despite lower spot prices (due to negative fuel margins recognised given the time lag in realising the benefits of lower coal and gas prices; 9M23 negative fuel margin amounted to RM768m compared to a positive fuel margin of RM917m enjoyed in 9M22).

• Overall, the 9M23 normalised net profit made up 71% of our full-year forecast and 64% of Bloomberg consensus. We expect 4Q23 earnings to be stronger as the negative fuel margin narrows further on the back of more stable coal prices.

Other Observations From the Quarter

• The GenCo reported a loss after tax of RM328m in 9M23 vs. a PAT of RM1.1bn in 9M22. If we normalise the earnings for the distortions caused by fuel margins, we estimate GenCo made a PAT of ~RM440m in 9M23 vs. ~RM193m in 9M22.

• Encouragingly, receivables continue to trend lower, standing at RM13.4bn in 3Q23 from RM14.5bn in 2Q23, RM19.7bn in 1Q23 and RM22.8bn in 4Q22.

• Electricity demand grew by 3.6% yoy in 3Q23, driven mainly by the commercial (+6.8%) and residential (+7%) segments while industrial remained weak (-1.6%).

• Generation mix during the quarter remained skewed toward coal (59%), followed by gas (35%) and the balance comprising primarily hydro and solar.

• Tenaga’s RE generation capacity mix increased by 2% pts yoy during the quarter to 18%, adding ~120MW of solar capacity in Australia following the completion of the acquisition of Spark Renewables on 20 September 2023.

Reiterate Add With a TP of RM12.00

• We continue to see TNB as a key beneficiary of the country’s National Energy Transition Roadmap (NETR), which aims to position Malaysia as a leader in the energy transition agenda in the region. Valuations are attractive for a liquid large-cap index stock, currently at an EV/EBITDA of 5x on 2024F estimates, whilst offering decent yields of close to 5%. Key catalysts include further details on Tenaga’s involvement in Malaysia’s RE ambitions creating a new growth angle for the stock. A resurgence in fuel prices and unfavourable changes to the Incentive Based Regulation (IBR) framework and ICPT mechanism are potential downside risks.

Source: CGS-CIMB Research - 27 Nov 2023