TENAGA is further expanding its RE portfolio by taking up a 49% strategic stake in an offshore wind farm in the UK from EDF Renewables of France. Although it is a small investment, we are positive with this move as the strategic partnership would set the pace for growing the group’s RE portfolio in the UK and Europe, with target to increase by 2,733MW by 2025. This also helps to address the pressing ESG concern that has pressured its share price in the past years. TENAGA remains an OP with TP of RM11.80.

First venture into the offshore wind farm. Yesterday, TENAGA announced that it has, via its wholly-owned subsidiary, Vantage RE Ltd (Vantage RE), completed its acquisition of a 49% stake in Blyth Offshore Demonstrator Ltd (BODL) from EDF Renewables (EDFR), the RE arm of French state-owned utility company, Electricite de France (EDF). Currently, BODL owns an operating offshore wind asset comprising five turbines with installed capacity of 41.5MW which started in 2017 with a development right for an innovative floating offshore wind project of up to 58.4MW, that is currently in the early stage of development, located off the Northumberland coast in England.

Part of its quest to expand RE portfolio internationally. Although this is a small venture with effective installed capacity of 49MW only when the floating offshore wind project is completed, this is a good start as this strategic partnership with EDFR sets the pace for Vantage RE to grow in the UK and Europe. Currently, TENAGA has two RE assets in the UK, which are undertaken by Vortex Solar and Tenaga Wind Ventures. Both assets are now structured under Vantage RE which was set up in July this year. With this offshore wind farm acquisition, TENAGA will be operating close to 450W of RE investments in the UK.

Enough financial strength to take RE expansion. To recap, TENAGA has set to achieve RE assets of 8,300MW by 2025 from 3,406MW currently, with RE making up 10% of group revenue from 5% currently. While there is no disclosure of acquisition price for BODL, it has budgeted RM6.5b for the entire RE capacity expansion where >97% of these are from two geographical areas, 2,733MW in UK/Europe and 1,800MW 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.

Keep OUTPERFORM for resilient earnings. We remain positive with its RE expansion plan and its commitment to be coal-free by 2050, to address the ESG concerns which has been lingering its share price in the past two years. Meanwhile, we also like its resilient earnings profile which keeps its dividend payout consistent with potential special dividend in place. Thus, its prospective FY22E PER of 10.6x 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 an unchanged target price of RM11.80 which embedded a RM2.05 EGS discount from its mean valuation of RM13.85. 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 - 21 Oct 2021