• Pilot project to assess fibre potential

• A step towards monetising a legacy asset

• Likely to limit capex exposure to backbone infra

• Re-affirm BUY at unchanged TP of RM16.90

Pilot project to test fibre infra. Tenaga has initiated a pilot project in Jasin, Melaka to assess the technical, safety and commercial viability of using Tenaga’s electrical infrastructure for the Government’s National Connectivity Plan (NCP). The pilot project is targeted to be completed by end-2018, will cover 1100 of 4300 homes in 3 areas: (1) Taman Merbau (2) Taman Maju (3) Felda Kemendor, all in Jasin.

Monetisation of legacy asset. The development is a step towards potential monetisation of Tenaga’s fibre assets. The fibre asset is utilised for Tenaga’s supervisory control and data acquisition (SCADA) system. We understand that the fibre (in certain parts of Tenaga’s network) runs all the way to the substations. The network is understood to be underutilised currently, but it is still uncertain at this juncture whether Tenaga is required to inject further capital to upgrade the existing fibre infrastructure for it to be commercially viable.

Tenaga to stick to core business. Tenaga is likely to stick to its core business in power generation, transmission and distribution and will likely limit its exposure to the fibre broadband business, possibly via: (1) Leasing out of its backbone fibre infra (2) Leasing out infrastructure than can support last mile connection e.g. extensive electrical pole network connection to homes – Malaysia has a high 99% electrification ratio. Given that the current fixed broadband space is dominated by TM, Tenaga’s potential entry into the fray is likely to infuse meaningful competition. We understand that Tenaga does not intend to get into last mile provision (as it will involve major capex and is not within Tenaga’s core business) and is open to partnership with 3rd parties for this.

HSBB capex. If we were to look at TM’s HSBB rollout as a yardstick, total investment for Phase 1 HSBB (Klang Valley and all key economic areas in the country) amounted to RM11.3b. This was a Public-Private partnership with the Government investing RM2.4b and TM investing RM8.9b. Phase 1 covered >1.3m premises. The investment involved backhaul investments up to the last mile and involved 800 broadbandenabled exchanges.

Recommendation. We re-affirm our BUY call on Tenaga at unchanged TP of RM16.90. Key catalysts: (1) Solid dividend yields of 4.6% (+ve spread against 10yr MGS of 4.04%) while valuations are cheap at 12x FY18F earnings, a substantial discount to the market’s 16x-17x. (2) Peaking capex suggests room for dividend upside (3) Possible monetisation of backbone fibre asset via partners.

Source: MIDF Research - 7 Sept 2018