We came away from a 3-day visit to TENAGA’S operation in the UK last week feeling upbeat on its renewable energy (RE) venture. It is set to increase its RE asset portfolio in the UK to up to 2.5GW from 1.0GW currently over the next five years, driven largely by investment in solar and wind farming. We maintain our forecasts, TP of RM14.50 and MARKET PERFORM rating.

Day 1: Vantage RE Ltd, Paddington, London.

The key observations from the visit are as follows:

• 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 in the UK and Ireland.

• It manages a portfolio of 94 sites with 806MW RE generation capacity, with two solar farms (102MW) currently under construction. This makes up 3%-4% of RE generation market in the UK. In 2022, the UK has approximately 53.5GW of RE generation capacity, accounting for c.41% of the country’s total energy generation. Meanwhile, Vantage RE aims to expand its RE asset portfolio up to 2.5GW over the next five years.

• Offshore wind farming is TENAGA’S key RE growth driver in the UK. Due to the windy nature of the UK’s weather, an offshore wind farm (45%−60% capacity factor) is able to generate a lot more electricity than a solar farm (typically 11%−13% capacity factor in the UK). In addition, battery energy storage is also critical to stabilise the grid.

• In addition to developing two solar farms, Vantage RE is in planning/development stage for four wind project site (114.6MW for on shore and 58.4MW for offshore) and nine battery energy storage system (BESS) project sites. The average cost per MW of a solar farm is GBP500k, GBP1.5m for an onshore wind farm and GBP2.5m for an offshore wind farm. Its target of new project IRR is high-single-digit, with cost of debt for >4% interest rate cost with tenure of 15 to 20 years.

• Unlike Peninsular Malaysia where off-take is mostly by a single buyer, i.e. TENAGA, there are several route-to-market options for RE generators in the UK, which range from traditional PPAs (including merchant utility PPA and corporate PPAs) to contracts for difference (CfD) and private wire. There are also several support schemes in place given by the authority, such as renewables obligation certificate (ROC), feed-in-tariff (FIT) and CfD. Vantage RE’s portfolio currently has a mix of off-take agreements.

• Its total assets grew from GBP841.0m in FY21A to GBP1.40b in FY23A. Similarly, its revenue stood at GBP135.9m (EBITDA margin: 69%) in FY23A as opposed to GBP 34.1m (EBITDA margin: 70%) in FY21A. Since 2017, TENAGA invested a total of GBP500m in Vantage RE with a-third being cash distributed cumulatively so far.

Day 2: Blyth offshore windfarm (Blyth) at Blyth, Northumberland.

• This is a brownfield project in which Vantage RE acquired a 49% stake in Oct 2021. With commercial operation date (COD) since Oct 2017, Blyth has a total capacity of 41.5MW (5x8.3MW turbines) with a 15-year PPA with off-taker EDF Renewables. It is under the subsidy scheme of ROC. This asset has an asset lifespan of 25 years on similar lease tenure.

• This green asset generates produces enough energy to power 34,000 households. Blyth was the first time a “float and submerge” gravity base foundation was used for offshore wind turbines. It was also the first offshore wind project to connect using 66kV cables.

• Its capacity factor is 30%-40% during summer with a higher capacity factor of 45%-53% during winter time.

• Its future plan, Blyth 2 is in planning stage with final investment decision (FID) is estimated by 2027 and COD by 2029.  This new offshore windfarm is with planned capacity of 58MW.

Day 3: Bunkers Hill solar farm, east of Reading Road (B3349).

• This is a first greenfield project for Vantage RE. Sitting on 260-acre land from a single land owner with a 40-year lease arrangement, this solar farm has an installed capacity of 66.7MWp with BESS capacity of 40MW. The grid export capacity is 50MW while grid import capacity for BESS is 40MW. This project started construction in early 2024 with COD scheduled in 3QCY24. It has already secured a 15-year CfD.

• There are no significant differences, in term of technology and specifications for solar farm in Malaysia and the UK, the only key different is the capacity factor is higher in Malaysia at c.16% vs. 11%-13% in the UK due to our tropical geographically.

• Vantage RE is actively engaged with local communities and helping them to maximise the benefits of RE. This project is expected to deliver a predicted biodiversity gain of over 50%. It has developed areas of wildflower meadow to benefit a range of wildlife including invertebrates and foraging bats as well as birds and small mammals. It will also ensure no pollution for the River Whitewater.

Conclusion: Although Vantage RE is relatively small at only c.5% of TENANGA’s total installed capacity, it propels TENAGA to the RE space in an advanced economy as well as state-of-the-art wind farming technology. It diversifies TENAGA’s RE sources as well as its RE investments geographically.

Outlook. TENAGA has found a new avenue of growth fueled 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 high steam turbine vibration and the repair works are expected to be completed by the end of the year. We have reflected a capacity payment loss of RM400m in our FY24F forecast.

Forecasts. Maintained.

Valuations. We maintain our DCF-derived TP of RM14.50 based on an unchanged WACC of 6.7% and TG of 2.5%. There is no adjustment to our TP based on our ESG 3-star rating (see Page 5).

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 fueled by electricity demand from data centres; and (iv) its heavyweight index-linked stock status. 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 - 9 Jul 2024