TENAGA has expressed its keen interest to participate in the development of Indonesian new capital Nusantara with energy solutions such as gas, solar, wind, hydro and battery storage. While Indonesia is not in its main focus market’s list, this could be a potential to expedite TENAGA’s green energy expansion and at the same time addressing the ESG issue. Maintain OP with unchanged TP of RM10.17.

In a press release last Friday, TENAGA revealed that, during the PM Datuk Seri Anwar Ibrahim’s two-day official visit to Indonesia last week, it has handed over a Letter of Intent (LOI) to the Chairman of the Nusantara Authority to express its interest in exploring and participating in the development and operation of energy solutions, such as gas, solar, wind, hydro and battery storage, in the new Indonesian capital city. TENAGA is also keen to explore any opportunity in the grid interconnection business through collaboration with PT Perusahaan Listrik Negara (PLN) to develop a secure and reliable high-voltage transmission infrastructure in Nusantara. Separately, TENAGA also handed over another LOI to PLN to review a previous MoU to allow both utilities to revive the exploratory study for the development of a high voltage interconnection facility between Sumatera and Peninsular Malaysia.

Nusantara is a new green city. While information pertaining to its utility infrastructure is scarce, the new capital city which sits on a 632,850-acre site is a green field development project from 2022 to 2035 with Indonesia targeting of becoming a developed country by 2045. It also aims of having 100% of renewable energy (RE) goals achieved at its installed capacity and becoming the first city in the world with a population of more than 1m to achieve this target. According to ASEAN Briefing, with Nusantara, East Kalimantan province possesses huge potential for clean energy with RE sources that could reach 20GW comprising 65% solar energy and 26% hydro power.

A potential to expedite TENAGA’s green energy expansion. It is still too early to conclude potential contract win given that this is merely a LOI. However, as it is one of the 11 LOIs which Malaysian companies submitted during the PM’s visit, it could be an G2G collaboration, thereby increasing TENAGA’s chances of participating in the green project. So far, Indonesia is not one of TENAGA’s RE focus markets (its focus markets in SEA are Thailand, the Philippines and Vietnam). TENAGA has projected the New Energy Division (which houses RE portfolio) to have installed RE capacity of 7.2GW by 2030 from 0.7GW in 2022. This will further increase to 9.9GW in 2040 and 14.3GW in 2050. Should TENAGA clinch the project, it should expedite TENAGA’s RE expansion program to achieve net zero emission by 2050.

OUTPERFORM maintained. We remain optimistic on its effort to address lingering ESG concerns. 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. The 20.0 sen/kWh surcharge in 1HFY23 should likely see the reduction of ICPT under-recovery in the future. OUTPERFORM is reaffirmed with unchanged TP of RM10.17 which is based on a 5% discount (due to 2- star ESG rating) to our DCF-derived valuation of RM10.70.

Risks to our recommendation include: (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 - 16 Jan 2023