We view positively TENAGA’s Sustainability Pathway 2050. While some of the plans/ideas are still in the conceptualising stage, it does demonstrate the commitment of the national utility company towards ESG compliance. It has an ambitious RE target of 14GW by 2050 from 0.4GW currently. Meanwhile, a GenCo listing is two years away. Maintain OUTPERFORM and forecasts but reduce TP by 5% to RM10.27 (from RM10.81) having reflected a 5% discount on a 2-star ESG rating as appraised by us.

TENAGA during its Investors Day yesterday spoke about a fast-tracked sustainability agenda that will see major changes to its entire value chain comprising generation company (GenCo), new energy division (NED), grid and EV. The key highlights are as follows:

1. GenCo: to completely phase out coal-fired plant by 2045 from 48% gen-mix currently; it will repower certain retired coal plants using highly efficient CCGT with cleaner fuel, i.e., gas, and hydrogen ready technology (green tech). Potential IPO likely after two years as it needs time to create better value before seeking for a listing.

2. NED: aggressive target of installed capacity of c.14GW by 2050 for Renewable Energy business (excluding hydro) from 0.4GW currently with a total CAPEX of c.USD152b over the next 28 years with targeted portfolio EIRR of 7%-9%

3. Grid: regulated asset base (RAB) for Grid to increase by 61% to RM45b (earnings potential of RM3b) by 2050 from RM28b in 2022. It plays a key role in accelerating ASEAN power grid development which could open up more opportunities for investment in RE.

4. EV: targets 3,300 charging points to serve 30,000 BEV cars by 2025 and 18,000 charging points and 500,000 BEV by 2030. It announced early this month an RM90m investment to deploy 9 Electron Hubs (along high-volume highway), 25 stand-alone DC fast-charges (along highway and trunk roads) and 72 destination charges. (TENAGA premises).

OUTPERFORM maintained. While there are headwinds over the near term particularly the ballooning under-recovery of fuel costs (that strains TENAGA’S cash flow), there is no change to the fuel cost pass through mechanism within the regulated business framework. Meanwhile, the demand for electricity, especially from the commercial and industrial segments will recover in tandem with the reopening of the economy. We maintain our OUTPERFORM rating with a lower TP of RM10.27, having imputed a 5% discount to our DCF-derived valuation of RM10.81 based on a 2-star ESG rating as appraised by us (see Page 2).

Risks to our recommendation: (i) ballooning under-recovery of fuel costs, straining its cash flow; (ii) a global recession hurting demand for electricity; and (iii) Non-compliance of ESG standards set by various stakeholders.

Source: Kenanga Research - 17 Aug 2022