Tenaga has been undergoing restructuring exercises and strategizing towards meeting RE, digitalization and network sustainability. The group has proposed to the Energy Commission to allocate RM26bn for Smart Grid investments for FY21-25, which will be integrated as part of allowable capex under RP3 (2022- 2024). We maintain our BUY recommendation on Tenaga with unchanged DCFE derived TP of RM12.50.

Result recap. Tenaga’s reported a strong 1QFY21 core PATMI at RM1.5bn (+8.6% QoQ; +41.7% YoY) mainly attributed to a combination of: (i) lower power distributional loss; (ii) higher power generation from own hydropower, due to exceptionally higher water level during monsoon season, contributing over RM200m extra income; and (iii) lower energy sourcing from IPPs. However, management suggested that hydropower generation is not expected to sustain at such a high level throughout the year.

RE target. Management continued to highlight the group’s RE target of 8,300MW capacity by 2025 is well on track, with GSPARX securing more commercial and retailer solar PV projects, GenCo securing more LSS projects and planning for more hydropower projects on local front and forming partnership with Sunseap to penetrate into Singapore and Vietnam solar power market.

HSBB initiative. TNB wholly owned subsidiary, Allo Technology has expanded its fibre broadband footprint to 63k premises (with only RM5m capex) and is targeting 150k premises by 2021 in Melaka, Perak, Kedah, Penang and Johor (expect minimal capex as they leverage on Tenaga’s existing infrastructure). The initiative will enhance TNB’s non-regulated revenue stream.

Smart Grid investing. Under RP3, TNB is focusing on enabling Green Energy, Digitalization and Network Sustainability through Smart Grid 2020-2025, an integration of green energy generation, smart meter, energy storage, EV charging station and IR4.0 (IoT, machine learnings, automation). The proposed investment budget is RM26bn (FY21-25) as part of allowable capex under IBR framework. It was guided EBIT for the segment will improve from current RM2.56bn in FY20 to RM3.41bn in FY25.

Forecast. Unchanged.

Maintain BUY, TP: RM12.50. We maintain BUY on Tenaga with unchanged DCFE derived TP: RM12.50, given stable cash-flow and dividend payout. Tenaga’s earnings are expected to rebound in FY21

Source: Hong Leong Investment Bank Research - 31 May 2021