Tenaga has proposed to reorganise its business segments, where its domestic power generations will be placed under subsidiary GenCo and electricity retail businesses under subsidiary RetailCo, while Tenaga will still retain transmission & distribution, international ventures and corporate shared services. The main objective of the exercise is to allow Tenaga better focus on the growth of each business segments, while in anticipation of government’s initiative to transform the utility sector. Maintain HOLD recommendation on Tenaga with unchanged TP: RM13.65, based on DCFE.

NEWSBREAK

Tenaga has proposed an internal reorganization exercise, where Tenaga’s domestic power generation and electricity retail businesses will be placed under new holding companies i.e. GenCo and RetailCo. The main objective of the exercise is to allow for greater focus in driving improvement in efficiency, agility and performance, as all segments will be managed under separate boards and managements to steer each of them respectively. The exercise will also allow Tenaga to better prepare for the continuous changes in the utility sector, while having the flexibility to raise new capital from the market. The whole exercise is expected to complete by 3Q20.

GenCo… will own all domestic power generation (excluding 2 hydro plants, which will eventually be transferred at a later date), operation & maintenance services and Integrax port operation. The proposed GenCo has net asset value of RM12.14bn. GenCo will continue to increase conventional capacity through plant-ups and repowering projects, participate in government’s RE initiatives and expand REMACO’s oversea operations. The EBIT of the segment was RM1.6bn in 2018, while the management is targeting to achieve RM2.6bn in 2025.

TenagaCo… will retain the transmission and distribution business segment, international ventures (including GAMA, GMR, Solar Vortex and UK Wind), TNB fuel services and Tenaga corporate shared services. TenagaCo will focus on investments into smart grid to support for future prosumers development and new business potentials, turnaround existing international business while continue to explore new growth opportunities in the utility sector. The EBIT of the segment was RM4.9bn in 2018, while the management is targeting to achieve RM9.7bn in 2025.

RetailCo… will take over Tenaga’s retail business segment and rooftop solar business (GSPARX). RetailCo is anticipated to face market liberalization and competition as well as increasing environmental awareness. The proposed RetailCo has net asset value of RM1.84bn. Management will focus on expanding GSPARX business, provide smart solutions and diversify beyond energy offerings such as broadband and service bundling. The EBIT of the segment was RM0.2bn in 2018, while management is targeting to achieve RM0.7bn in 2025.

HLIB’s VIEW

Neutral impact to Tenaga, HOLD TP: RM13.65. We do not anticipate an immediate change to Tenaga’s earnings, as Tenaga will still retain 100% control over all the segments. Nevertheless, the exercise will allow for Tenaga to improve its segmental business focus in anticipation of on-going industry transformation and potentially allow Tenaga to raise new capital for GenCo and RetailCo. However, we do not discount the potential split up of Tenaga business for better market efficiency and competitions. We maintain HOLD recommendation on Tenaga with unchanged DCFE-derived TP: RM13.65. Tenaga’s earnings and cash flow are expected to be stable under the IBR/ICPT mechanisms.

Source: Hong Leong Investment Bank Research - 31 Jul 2019