• Targeting to derive 5GW net capacity from overseas by 2025

• Interestingly, management now open to investments in developed regions such as Europe

• Underpins our view of the need to utilise Tenaga’s underleveraged balance sheet for better returns

• Re-affirm BUY at unchanged DCF-derived target price of RM16.80/share. 4% yield is attractive.

Looking for new capacity abroad. Tenaga is targeting to derive 5GW of net capacity from overseas operations by 2025 from the current 2GW net capacity from India and Turkey. Tenaga currently has ~13GW capacity in Malaysia. Tenaga is also targeting overseas investments to account for 20% of earnings by 2025 and for EBIT to grow at 10% annually from RM8b in FY15 to RM20b by FY25. Currently, contribution form overseas operations are negligible. While these are long-term targets, the moves underpin our view of the need for Tenaga to expand abroad for: (1) Better growth potential given plateauing growth in Malaysia at just 2%-3% per annum (2) Better returns from overseas generation projects – mostly in the teens at least, versus single-digit returns in Malaysia. Most importantly, Tenaga’s balance sheet is underutilised (at 0.3x net gearing, one of the most under-geared utilities in the region) and it is timely to reinvest into new growth opportunities.

Opens up to opportunities from developed countries. Previously, TNB had highlighted countries in the Middle East, South Asia and ASEAN as regions under their radar. Tenaga had already acquired equity stakes in GAMA Enerji (Turkey) and GMR Energy (India) this year. Within ASEAN, among countries under screening include Indonesia and Philippines which are currently underserved. Interestingly this time around, management is quoted as also interested at looking at opportunities in the more developed markets such as Europe which entail well established regulatory framework.

Recommendation. We re-affirm our BUY call on Tenaga at unchanged DCF-based TP to  RM16.80/share. We like Tenaga for: (1) Dividend catalyst on the back of FCF yield of ~7% over FY17F/18F, a relatively under geared balance sheet at 0.35x and the upcoming capital optimisation exercise (2) Overseas expansion provides scope for stronger growth in the mid-term (3) Strong earnings visibility post-ICPT implementation. Capital management and the resolution of its RM2b tax issue with the Inland Revenue Board are key catalysts over the next 12 months.

Source: MIDF Research - 16 Dec 2016