Post management meeting, we stay positive on Tenaga’s earnings outlook under RP3 and ICPT mechanism. Management guided ICPT of RM16.4bn for EC’s approval for 1HFY23. Management believes the new government will remain committed towards ICPT. In the short-term, Tenaga will continue to incur higher working capital in order to finance the high fuel energy costs. Government is providing a financing guarantee of up to RM6bn. We maintain our BUY recommendation on Tenaga with unchanged DCFE-derived TP of RM11.65.

Results recap. Tenaga reported 9MFY22 core PATMI at RM4.0bn, in line HLIB’s expectation, but above market. The result highlights the group’s earnings sustainability under RP3 despite the surge in fuel costs, with the group recognising ICPT of RM15.2bn in 9MFY22. The drop of -4.4% YoY in core earnings, was due to higher net finance expenses, lower associates’ contribution and higher tax expenses.

ICPT. Tenaga recognised accrual of +RM15.2bn ICPT in 9MFY22, as fuel input costs were higher than reference prices. Gas cost was RM30/mmbtu for Tier 1 and averaged RM39.5/mmbtu (vs reference RM26/mmbtu) and coal cost was RM910.50/mt (vs reference RM325.72/mt). The Energy Commission has approved RM7bn of ICPT (RM5.8bn subsidized by government) in 1HFY22 to be recovered in 2HFY22. Management has guided potential ICPT approval of RM16.4bn in 2HFY22. Management is confident the new government will continue to honour the ICPT mechanism (as it has been since implementation in 2014) and Tenaga will be able to recoup the entire amount within 6 months period.

Dividend. Given the improved cash flow outlook in 2HFY22, management is indicating for a potential dividend at the higher range of its 30-60% dividend payout policy (based on adjusted PATAMI). This will likely entail 45-50 sen/share for the year (20 sen/share for 1HFY22).

Green Energy. Several green projects have been approved. Re-power Paka with 1,400MW (operational by 2029) and new CCPP Kapar with 2,100MW (operational by 2021), powered by combination of gas and hydrogen, has a combined budget of RM15.8bn. Tenaga is also exploring similar plan for Manjung1-3 (still in early stage). The hydro projects Nenggiri with 300MW (operational by 2027) and life extension of Sg Perak with 650.75MW (operational by 2025) have combined capex of RM10.8bn. TNB Selambau LSS with 50MW (operational by 2023) has also received additional 4 years extension to its PPA tenure. The group has also secured a 100MW greenfield solar plant in UK. These projects are estimated to avoid 9.83m tCO2-e/year.

T&D. Continuous investment to modernise the grid in support of Energy Transitioning and the transmission in strengthening power security and regional inter-connection.

Retail. GSPARX unit continued to secure increasing projects for rooftop solar solutions, amounting to 125MWp YTD, as the unit collaborates with various property developers, commercial and industrial users. TNB is also investing into EV charging facilities in collaboration with Gamuda Land and PLUS highway.

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 FY22-23. 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 - 9 Dec 2022