Post management meeting, we remain positive on Tenaga’s earnings outlook under RP3 and ICPT mechanism. However, cash flow to finance the surge in fuel energy costs remains a concern. Government is providing a financing guarantee of up to RM6bn. Management continued to highlight its strong commitments towards net zero emission target with bold plans to reduce reliance on coal power plants, implementing technologies to reduce carbon emissions and exploring opportunities in RE development. We maintain our BUY recommendation on Tenaga with unchanged DCFE-derived TP of RM11.65.

Result recap. Tenaga’s reported 1HFY22 core PATMI at RM2.4bn, in line with market expectations. The result highlights its earnings sustainability under RP3 despite the surge in fuel costs, with the group recognising ICPT of RM9.4bn in 1HFY22. The drop of -9.8% YoY, was due to lower hydropower generation and the higher negative impact of MFRS16 by RM187.7m.

ICPT. Tenaga recognised accrual of +RM9.4bn ICPT in 1HFY22, as fuel input costs were higher than reference prices. Gas cost was RM30/mmbtu (vs reference RM26/mmbtu) and coal cost was RM847.30/mt (vs reference RM325.72/mt). However, the Energy Commission only approved RM7bn of ICPT (RM5.8bn subsidized by government) from 1HFY22 to be recovered in 2HFY22. With the on-going high fuel energy costs, the Energy and Natural Resources Minister has indicated potential ICPT of RM20bn in 2HFY22. The potential higher ICPT would mean Tenaga needs higher working capital requirement to finance the higher energy costs and government has stepped in to provide a financing guarantee of up to RM6bn. Tenaga has assured that the higher working capital requirement will also be compensated under upcoming ICPT adjustments. It was also revealed (in the media) that the government is looking into ways to address the high energy cost issue, including through the provision of targeted (energy) subsidies in the future.

GenCo. On the domestic front, Tenaga has received approval from the government to re-power Paka site with 1,400MW plant capacity, powered by combination of gas and hydrogen, with a budget of RM6.3bn. Previously, we understand that Paka will be initially powered by 100% gas during commercial operation in 2030, targeting 70% gas and 30% hydrogen in 2035 and achieving 100% hydrogen by 2040. However the terms of the PPA has not been finalised yet. Tenaga is also exploring similar plan for KEV (currently in discussion) and Manjung1-3 (still in early stage). Tenaga is also exploring co-firing coal power plants (for power plants expiring post 2030) with ammonia (starting 1%, progressively to 10%), which will contribute to lower carbon emission.

RE. Management highlighted its focus in developing its RE portfolio (focusing on LSS, onshore and offshore wind) under newly established NED unit. The unit has 2 entities: (i) TRe, focusing on RE expansion opportunities in Malaysia and Asia Pacific region; and (ii) Vantage RE, focusing in UK and Europe region. From current 0.7GW capacity, NED is targeting 14.3GW capacity portfolio by 2050 with and estimated equity investment of USD7bn.

Forecast. Unchanged.

Maintain BUY, TP: RM11.65. We maintain BUY on Tenaga with unchanged DCFE derived TP of RM11.65 as earnings are expected to remain stable in FY22. We are positive with Tenaga’s long term commitment into the ESG growth path, while ensuring return to shareholders.

Source: Hong Leong Investment Bank Research - 2 Sept 2022