TENAGA has committed to reduce its dependency on the more polluting coal-fired plants by 50% of capacity by 2035 before being coal-free by 2050, and we believe this is achievable. For a start, it will spend RM6.5b on 4,894MW RE expansion from now till 2025. And, this will not dent its balance sheet. Overall, we are positive on these plans which help to address the ESG issue which has pressured its share price in the past year. TENAGA remains an OP with a revised TP of RM11.80.

Journey to RE. As of March this year, coal-fired plants made up 48% of TENAGA’s generation asset portfolio in Peninsular Malaysia and contributed c.24% to group revenue. To address these issue, TENAGA has set to increase its renewal energy (RE) assets to 8,300MW by 2025 from 3,406MW currently, with RE making up 10% of group revenue from 5% currently. It has budgeted RM6.5b for this capacity expansion where >97% of these are from two geographical areas, UK/Europe and Southeast Asia with only 361MW expansion locally. Meanwhile, our stress test shows that TENAGA has no financial issue for such expansion with its gearing still at comfortable levels of 45%- 46% throughout FY22-FY25, meaning it still has room to gear up to the optimal level of 55%, from 46.3% in FY20A.

To be coal-free by 2050. After its last new coal plant, the 70%-owned Jimah East Power (JEP) which was commissioned in 2019, TENAGA has pledged not to invest in greenfield coal plant in the future. It has committed to reduce coal-based capacity by 50% in 2035 and to be coal-free by 2050. We believe this commitments are achievable given that two TENAGA’s owned coal plants will be retired in 2029 and 2030, which would reduce its coal generation capacity by 46% by 2030 while the last coal plant JEP’s PPA will expire by 2044, after which there will be no more coal-fired plant, way ahead of its 2050 coal-free target.

Foreigners turned net buyer. Its share price movement is fairly correlated to the changes of its foreign shareholding at 78%. The selling pressure intensified in the past two years as foreign shareholdings fell below the 20% mark in early 2019 to currently slightly below 12%, given the coal-based energy generating issue. However, the degree of sell-down has somewhat abated in the past 2- 3 months. In fact, foreigners have turned net buyers for the first time in 21 months in Aug with net buying worth RM154m. Month-to-date in September, foreigners remained net buyers with a total net buying of RM94.7m. However, we reckon that this is still too early to conclude that the foreigners are finally coming back to buy this index-link heavyweight stock.

OUTPERFORM for resilient earnings. We are positive with its RE expansion plan and its commitment to be coal-free by 2050, to address the ESG concerns. We also like its resilient earnings profile which keeps its dividend payout consistent with potential special dividend in place. Thus, its perspective FY22E PER of 10.7x seems fairly attractive which values the stock at 1.5SD below its 3-year mean. As such, we continue to rate the stock an OUTPERFORM with a higher target price of RM11.80 from RM11.76, reflecting its updated asset valuation and trailing mean PER. The stock is also supported by a decent dividend yield of >4% with potential special dividend. Downside risk to our recommendation is weaker-than-expected earnings from non-regulated businesses.

Source: Kenanga Research - 28 Sep 2021