TENAGA’s 100%-owned United Kingdom-based Vantage RE is its key to renewable energy (RE) expansion plan. The unit is expected to meet one-third of the group’s target RE asset portfolio of 8.3GW by 2025. Vantage RE is open to both greenfield and brownfield expansions focusing on offshore wind and battery energy storage. We maintain our forecasts, TP of RM11.90 and OUTPERFORM rating.

Recently, we held a virtual engagement session with TENAGA’s United Kingdom (UK) unit, Vantage RE Ltd to obtain updates on the company as well as the overall UK and EU renewable energy (RE) landscape. The key highlights are as follows:

1. TENAGA started investing in the UK in 2017 and Vantage RE was set up in 2021 as a growth vehicle to drive sustainable growth in the UK and Europe’s RE markets via acquisitions of operating assets as well as those under development. Its current asset portfolio consists of solar farms, onshore and offshore wind farms, all in the UK.

2. It currently has 855MW of operating assets comprising those under construction and secured development rights of certain projects. Vantage RE aims to expand its RE asset portfolio up to 2.5GW by end-2025 and it is confident of achieving the target. Details of the projects will be made available as they come onstream with more clarity on the growth trajectory in a year’s time.

3. Offshore wind farms and battery energy storage are the key areas that will drive future growth. Due to the nature of the UK’s weather, an offshore wind farm (45%−60% efficiency) is able to generate 6x more than a solar farm (11%−12% efficiency). Hence, battery energy storage is critical to stabilise the grid and the focus now is on co-location storage.

4. Vantage RE prefers greenfield expansion due to the higher returns although it is also looking at brownfield projects, especially in new markets such as Ireland, France, Spain and possibly Italy. In terms of financing, it sees good access, riding on TENAGA’s strong balance sheet and the keen interest from many Japanese banks in the UK that are aggressively funding RE projects. The average cost of a solar farm is GBP500k−600k/MW, GBP1m−1.2m/MW for an onshore wind farm and GBP2m−3m/MW for an offshore wind farm.

5. The UK’s energy policies are generally supportive of RE as various policies and schemes are in place to achieve the country’s net-zero target by 2050. The UK’s total RE installed capacity is expected to hit 87.2GW by 2030, making up 74% of its power generation mix with offshore wind (41%) being the largest generation asset followed by onshore wind (17%). As at 2022, the UK has 53.5GW of RE generation capacity, accounting for 41% of the country’s total energy generation mix with offshore wind comprising 15% and offshore wind 12%.

6. The UK has several schemes to support RE growth. Two of the schemes are: (i) contracts for difference (CfD) subsidy scheme which enables RE developers to receive a “top-up” payment from the government when the market reference price falls below the strike price. The CfD scheme is currently in its fourth round, with a total budget of GBP285m a year, (ii) RE Guarantees of Origin (REGO), which are certificates that track the generation of renewable electricity from a specific RE source, thus providing transparency to consumers who purchase RE from their suppliers. REGO prices have been climbing from GBP1/MW when it started in 2009 to GBP15/MW currently. Vantage Solar and CEI UK have locked in record high REGO prices with expected upside over the next five years.

7. There are four route-to-market options for RE generators in the UK, which range from traditional PPAs (including merchant/utility PPAs and corporate PPAs) to CfD and private wire. Vantage RE’s portfolio currently is a mix of CfD and corporate PPAs.

Forecasts. Maintained.

We continue to like TENAGA for: (i) its dominance 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 indexlinked stock status. In addition, its dividend yield is decent at c.4%. Maintain OP at unchanged DCF-derived TP of RM11.90 (WACC: 6.7%; TG: 2%). There is no adjustment to our TP based on our ESG 3-star rating (see Page 6).

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

Source: Kenanga Research - 3 Nov 2023