Tenaga’s investor day on “Net Zero 2050” highlighted Tenaga’s ESG commitment towards reducing 35% emission intensity by 2035 and achieve net zero emission by 2050. Various initiatives and programs have been determined and penned out with clear objectives, including transforming the transportation sector (second largest CO2 emission in Malaysia). Nevertheless, management acknowledges Tenaga’s energy transition journey is not without uncertainties along the way. We remain positive on Tenaga’s earnings outlook and the group’s commitment towards RE development. We maintain our BUY recommendation on Tenaga with unchanged DCFE–derived TP RM11.65.

Power Generation. Under newly established subsidiary GenCo, the power generation unit is planning to fast track its decarbonisation exercise through: (i) coal plants early retirement; (ii) repowering plants with cleaner fuel and green-tech – e.g. gas and hydrogen; and (iii) implementing new technology via strategic technology partnership, e.g. carbon capture unit and nuclear SMR. The unit is also exploring regional opportunities for hydro power and gas power investments, with a target of ~800MW capacity by 2050. Management reveals the main objective is to maintain sustainability while ensuring earnings growth. GenCo aims a target of RM40bn revenue by 2050 (RM19.5bn in 2021). Management clarified the possibility of listing for the unit will be more of a mid-term strategy post restructuring of GenCo in becoming a more viable ESG asset and earnings.

New Energy Division (NED). A newly established unit, NED, is mandated to expand TNB’s renewable energy portfolio on both domestic and international markets. The unit will focus on solar PV, onshore and offshore wind, and battery storage solution. NED is targeting to grow its asset to 14.3GW capacity (currently 0.7GW), via new development assets (green field) and operational assets (brown field) in identified markets in Europe, Asia-Pacific and South East Asia. Eventually, NED is targeted to be monetized by 2028 via public/private equity markets.

Grid – Transmission & Distribution (T&D). Currently, the T&D segment is regulated under the IBR structure. Management guided heavy investments needed to further enhance and transform the infrastructure in order to support for: (i) growth of variable RE & distributed energy resources; (ii) growth of transportation (including EV charging stations) and industrial electrification; (iii) reduce carbon foodprint; and (iv) improve efficiency and reliability. The estimated RAB structure is expected to grow to RM100bn by 2050 (translating into potentially RM23.5bn revenue by 2050 from current RM13.7bn), as Tenaga is projecting to invest RM7-13bn annually on regulated assets T&D.

Retail. Retail segment is a customer fronting division, having utmost important task of customer transformation via creating awareness/literacy (through various media and public channels) and empowerment to shape customer affinity toward energy savings, efficiency and green energy. Tenaga will continue to improve customer experience via digitalization with additional value added services and green energy solutions (via GSPARX and TNBX). GSPARX provides rooftop solar PV and battery solutions while TNBX provides solutions for Green Electricity Tariff, E-Mobility, Supply Agreement for RE, Energy efficiency, and Blue/Green hydrogen for industrial users.

EV-mobility. As a major electricity group in Malaysia, Tenaga plays an important part in championing the adoption EV-mobility in the country, in turn converting vehicles emitting CO2 to become clean (zero emission). Transportation sector is Malaysia’s second largest CO2 emission, after the power sector. Management has established a 10-year roadmap for EV infrastructures, platforms and solutions, as well as electrifying the group’s fleet while investing into R&D. Tenaga is also a member of ZEVA (Zero Emission Vehicle Association), which works together with the government in promoting EV usage in Malaysia. Tenaga expects BEV cars to achieve over 500k units by 2030 with annual electricity consumption of 2.3 TWh and revenue of RM1.3bn. Tenaga has forecasted EV price to reach parity with fuel-powered vehicle by 2026, when local OEMs will commence local manufacturing/assembling.

Smart City Sandbox. As part of its ESG initiative, Tenaga is also assessing to develop its own 600 acres landbank (500 acres in UNITEN) as Smart City Sandbox, which will incorporate Tenaga’s various ESG-pivoted infrastructures and solutions (including real time data tracking & surveillance of city operations), enabling a net zero carbon ecosystem and sustainability. Tenaga will be working with like-minded experienced developers and solutions providers for the project. Smart City Sandbox will incorporate connectivity, energy efficiency, mobility and universal design guideline. Such a development is hopeful to become a role model for future property developments in Malaysia.

Maintain BUY, TP: RM11.65. We are overall positive with Tenaga’s commitment towards Net Zero 2050. Management has identified and penned out various initiatives and plans in achieving their objectives and targets. Moreover, Tenaga is also supporting the transformation of transportation sector as well as future property development model. While achieving net zero emission by 2050, management also identifies earnings growth opportunities. We maintain BUY on Tenaga with unchanged DCFE-derived TP: RM11.65. We are positive with Tenaga’s long term commitment into the ESG growth path, while ensuring returns to shareholders.

Source: Hong Leong Investment Bank Research - 17 Aug 2022