TENAGA’s 1QFY24 results met expectation. Its 1QFY24 core profit eased 11% YoY as higher tax more than offset a significantly lower negative fuel margin. It has found a new avenue of growth fuelled by power needs from data centre investment of >5,000MW by 2035, equivalent to 20% of the total generating capacity in Malaysia. We maintain our forecasts but lift our TP 9% to RM12.45 (from RM11.40). Maintain MARKET PERFORM.

TENAGA’s 1QFY24 core profit met expectations, coming in at 22% and 23% of our full-year forecast and the full-year consensus estimate, respectively. No dividend was declared during the quarter as expected as it usually pays half-yearly dividends.

YoY, its 1QFY24 revenue grew 8% on higher electricity sales (+11%) mainly driven by commercial (+11%) and industrial sectors (+3%), while its international RE investment unit, i.e., TNB International (which consists of Vantage RE in the UK and Spark Renewables in Australia) reported a 50% growth in revenue. However, its 1QFY24 core profit declined 11% as more than doubling in tax offset a significantly smaller negative fuel margin of RM25.8m (vs RM312.7m a year ago) as coal prices stabilised. Its total fuel costs fell 13% as applicable coal price (ACP) plunged 31% to RM540.2/MT (but this was passed through).

QoQ, its 1QFY24 core profit jumped 78% on a flattish top line driven by lower opex such as repair & maintenance (-21%), staff cost (-8%) and general expenses (-42%), which more than cushioned a negative fuel margin of RM25.8m (vs. a positive fuel margin of RM149.2m three months ago. Its total fuel cost dipped 2% as ACP eased 1%.

Meanwhile, the ICPT under-recovery increased 12% QoQ in 1QFY24 to RM2.35b (from RM2.11b) which was still 63% off the peak of RM6.40b in 4QFY22 as the ACP declined. As a result, its total receivables (inclusive of ICPT receivables) grew by 8% to RM11.29b from RM10.41b in 4QFY23 which is still manageable.

Outlook. TENAGA has found a new avenue of growth fuelled by electricity demand from data centre investment of >5,000MW by 2035, equivalent to 20% of total generating capacity in Malaysia. Meanwhile, with stabilising coal prices, it is likely to be spared huge negative fuel margins. Its Manjung 4 Plant has been on forced outage since Dec 2023 due to steam turbine high vibration, and repair works are expected to be completed this year-end. We have reflected the loss of RM400m capacity payment in our FY24F forecast.

Forecasts. Maintained.

Valuations. However, we upgrade our DCF-derived TP by 9% to RM12.45 (from RM11.40) as we raise our TG assumption to 2.5% from 2.0% (with an unchanged WACC of 6.7%) driven by the new avenue of growth fuelled by electricity demand from data centres as mentioned. There is no adjustment to our TP based on our ESG 3-star rating (see Page 6).

Investment case. 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, (iii) its new avenue of growth fuelled by electricity demand from data centres, and (iv) its heavyweight index- linked stock status. However, its valuations are fair at the current levels. Maintain MARKET PERFORM.

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 - 4 Jun 2024