TENAGA is a beneficiary of the proliferation of new data centres in Malaysia given their huge appetite for electricity. Except for earnings hit from negative fuel margin, the recent lower fuel cost is positive to TENAGA as it brings down the Imbalance Cost Pass Through (ICPT) receivables. We cut our FY23F by 14% (to reflect the negative fuel margin) but maintain our TP of RM11.15 (FY24F base year). Maintain OUTPERFORM.

We came away from TENAGA’s post-2QFY23 results briefing feeling encouraged on its prospects.

1. In addition to economic recovery, the demand for electricity over the immediate term will be driven the proliferation of new data centres, and to a lesser extent, the adoption of electric vehicles (EV) in Malaysia. Over the next 12 months, five new data centres will come on-line. They will consume about 2,000MW of electricity. TENAGA is well-positioned to capitalise on this given its reserved margin of 40%.

2. Amidst falling fuel cost, TENAGA took a significant hit in its recently announced 2QFY23 results due to negative fuel margin (arising from its coal inventory cost being significantly higher than the applicable coal price). However, the weaker fuel cost also resulted in its ICPT receivables declining by another 36% QoQ to RM8.9b in 2QFY23 from RM13.8b in 1QFY23 and 47% off the peak from the all-time-high of RM16.9b in 4QFY22. Given the persistent downtrend in the fuel price, it expects its ICPT receivables to fall to RM7b in 1HFY24. The shrinking ICPT receivables will result in lower working capital requirements and hence lower interest expenses and better earnings going forward.

3. TENAGA shared that, incidentally, there is also a declining trend in its non-ICPT receivables. It observed over the past few months that its collection has exceeded the amount billed, indicating that its customers have been settling their past dues as their cashflow positions improved on the back of the economic recovery.

4. While decarbonising its coal plants, TENAGA is ensuring security of supply by deploying renewal energy (RE) through hydropower plants and floating solar (development of 2.5GW) while investing in clean energy such as hydrogen, ammonia co-firing and carbon capture, usage and storage (CCUS). TENAGA is now at 48% of its targeted RE installed capacity of 8.3GW by 2025 (at 4.0GW as of Jun 2023). An addition of 1.2GW domestic capacity will be added by 2025.

Forecasts. We cut our FY23F earnings by 13% as we impute RM650m negative fuel margin into our forecast. We also cut our FY23F NDPS forecast proportionally based on an unchanged payout ratio of 50%.

However, we maintain our DCF-derived TP of RM11.15 (base year: FY24F; WACC: 6.7%; TG: 2%) which reflects a 5% discount given a 2-star ESG rating as appraised by us (see Page 5).

We continue to like TENAGA for: (i) its dominant position in power generation, transmission and distribution in Malaysia, (ii) its defensive earnings backed a resilient domestic economy and assets that are largely regulated, and (iii) its heavyweight index-linked stock status. Maintain OUTPERFORM.

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

Source: Kenanga Research - 5 Sept 2023