Last week, TENAGA announced two power plant projects, a repowering of its Sg Perak hydro power plant and a greenfield 2,100MW combined cycle gas-fired power plant in Kapar, to accelerate its Energy Transition agenda in achieving its net zero 2050 emission aspiration. While it is earning-neutral to the group, it demonstrates the commitment of TENAGA towards ESG-compliance. Maintain OUTPERFORM and TP of RM10.17, having reflected a 5% discount on a 2-star ESG rating as appraised by us.

TENAGA announced two power plant projects last week, i.e.,

1. On Thursday, it released the New Clean Energy Program: Hydro Life Extension Program for Sg Perak Hydroelectric Power Plants Scheme. This project, with total capex of RM5.8b, is to uprate and upgrade the Sg Perak Hydroelectric Scheme which consists of five Stesen Janaelektrik (SJ) with a total of 18 generating units with the latest technology. The project, with installed capacity of 650.75MW, will commence in 3QFY24 with COD for first unit in 3QFY25 under a new 40-year PPA.
2. On Friday, TNB GenCo received a Letter of Intent from the Ministry of Energy and Natural Resources for the development of a 2,100 MW combined cycle gas-fired power plant in Kapar with hydrogen-fired combustion capability and the expected COD is in 2031. This is a greenfield project with capex of RM9.5b that will be constructed on TNB GenCo-owned land, located to the north of the existing 2,420MW Kapar Energy Venture’s (KEV) Power Plant. TENAGA owns 60% equity stake in KEV.

Replacement of existing generating assets. These two assets are expected to replace two other existing assets, i.e., the existing PPA of Sg Perak Hydroelectric Power Plants with capacity of 649.10MW which has been extended for five years till Aug 2027 while PPA for KEV Coal U3-U6 (1,474MW) will be expiring in 2029. Although impact to earnings is immaterial, this is a good move especially for the new Kapar plant as KEV is a problematic plant as its triple fuel (coal, gas and oil) firing capability is rife with technical issue. This new asset will eliminate the unwanted coal fuel component and at the same time with potential of turning it into a green tech asset. This would help to improve TENAGA’s ESG rating further in the future.

OUTPERFORM maintained. We are positive with its RE expansion plan and commitment to be coal-free by 2050 and address lingering ESG concerns which have been clouding its share price for the past 2- 3 years. On the other hand, we are also optimistic on its earnings resiliency as the ballooning under-recovery of fuel costs will eventually be recovered under the IRB framework with a 6-month lag. Nonetheless, we keep our 2-star ESG rating unchanged as new the Kapar plant does not change TENAGA’s power plant portfolio much, with effective coal asset reduced by 11.5% or 884MW only from 7,678MW currently. As such, our TP is maintained at RM10.17 which is based on a 5% discount (due to 2-star ESG rating) to our DCF-derived valuation of RM10.70. OUTPERFORM maintained.

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 - 25 Oct 2022