After achieving RM2.7bn core PATMI in 1HFY21, we expect earnings to remain sustainable into 2HFY21, leveraging onto the economic reopening under the National Recovery Plan. Tenaga is adopting “Sustainability Pathway towards 2050”, highlighting the group’s commitment towards ESG initiative s (clean energy), while ensuring sustainable return to shareholders. We maintain our BUY recommendation on Tenaga with unchanged DCFE-derived TP of RM12.50.

Result recap. Tenaga’s reported a strong 1HFY21 core PATMI at RM2.7bn, a growth of 41.9% YoY, mainly attributed to a combination of: (1) improved sales of electricity due to an overall more active economy; (2) higher ancillary business income (in tandem with less restrictive lock down measures); (3) higher own power generation (especially from own hydropower and commencement of Southern Power since early 2021); and (4) lower energy sourcing from IPPs. Earnings is expected to remain stable in 2HFY21, as the power sector is deemed as essential service during lockdown and will leverage onto the stronger power demand under the National Recovery Plan.

Sustainability. Management revealed its long term “Sustainability Pathway towards 2050”, strengthening its ESG commitment, while ensuring sustainable returns to shareholders. Tenaga aims to reduce the group’s coal capacity by 50% by 2035 and coal free by 2050. While the final target seems to differ from the Energy Commission’s current aspiration for 20% power generation capacity by 2039, management believed RE generation costs and technology advancement will eventually become comparable (if not better) alternative to coal generation by 2050. Tenaga’s last coal power generation Jimah East PPA will expire in 2044.

RE target. Management updated the group’s progress in RE initiatives: 1) Development of new 50MW LSS in Kedah under LSS4 program, to increase the group’s domestic LSS capacity to 130MW and GSPARX continued to gain traction in securing new solar capacity (currently 88MW); 2) Established Renewable Asset Company (RACo) in United Kingdom to pursue more RE business opportunity in Europe region (complementing Wind Venture and Vortex Solar), mainly to acquire the technology and expertise in RE despite potentially lower rate of return; 3) Expanding RE reach in ASEAN region, currently partnering Sunseap for corporate RE PPAs in Singapore and Vietnam.

Grid of the future. TNB is focusing on enabling Green Energy, Digitalization and Network Sustainability through Smart Grid 2020-2025. It is targeting to achieve EBIT RM6.1bn contribution from the initiative in 2025 (from current level of RM2.8bn). Previously, the guided proposed investment budget was RM26bn (FY21-25) as part of allowable capex under IBR framework.

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 remain stable in 2HFY21. We are positive with Tenaga’s long term commitment into ESG growth path, while ensuring returns to shareholders.

Source: Hong Leong Investment Bank Research - 30 Aug 2021