• Keep BUY and MYR11.50 TP, 24% upside and 5% yield. 1Q22 core profit came in within our expectations (-34% YoY). Earnings were down 34% YoY due to weaker generation contribution, higher tax expenses and Malaysian Financial Reporting Standards (MFRS) 16’s net movements. Peninsular Malaysia electricity demand continued to recover in 1Q22 (+4% YoY), led by better commercial and domestic consumption while its ambitious renewable energy (RE) targets could fuel medium- to long-term growth.

• At 20% and 19% of our and Street FY22 estimates, Tenaga Nasional’s 1Q22 core profit of MYR891m (-34% YoY) came in within our expectations. Note that our numbers have imputed MFRS movements (-MYR250m in 1Q22 vs -MYR147m in 1Q21).

• 1Q22 revenue fell 1% QoQ, on a lower electricity sales (-1%; dragged by industrial consumption), masking higher imbalance cost pass-through (ICPT) surcharge recovery and other regulatory adjustments. Core earnings dropped 3% QoQ on higher tax expenses. YoY, despite revenue increased 36% YoY driven by significantly higher ICPT recovery and electricity demand (+4%), 1Q22 core earnings decreased 34% YoY on weaker generation profit, as well as higher tax deferred tax and MFRS 16 net movements (evident by the higher finance cost and depreciation charge).

• Steady demand growth. Peninsular Malaysia electricity demand continued to recover in 1Q22 (+4%; led by better commercial and domestic consumption). Overall demand is projected grow 1.7% YoY in 2022. Note that generation cost has doubled YoY in 1Q22 due to higher gas and coal prices but impact to TNB is neutral as volatility in fuel costs is covered under the ICPT framework. We also saw a spike in gas generation mix that has increased to 54% in 1Q22 from 36% in 4Q21 with lower coal generation mix at 39%. Current RE capacity stands at 3.6GW (15% of total capacity) including the recent acquisition of 97.3MW onshore wind portfolio in the UK. This is still lagging behind its 8.3GW target by 2025, which suggests a more aggressive M&A within this segment going forward. Apart from that, TNB is also repowering its coal plant into a combined cycle gas turbine (CCGT) plant with co-firing capabilities, while progressively applying new emerging technologies to reduce carbon emissions. In tandem with Malaysia’s transition into low-carbon mobility, TNB has either entered into an MoU or collaborated with prominent partners in e-mobility, which includes the co- planning and co-deploying with charge point operators to ensure optimisation of chargers. TNB will open an electric vehicle charging station in Bangsar by the end of 2023.

• Keep BUY and DCF-based TP of MYR11.50. We maintain our earnings estimates and TP with the incorporation of an 8% discount based on our ESG scoring of 2.6. The stock is trading close to its 7-year low, and foreign shareholdings stood at 12.1% as of Mar 2022 (Dec 2020: 12.9%). Downside risks: Higher operating costs and higher-than-expected plant outages.

Source: RHB Research - 31 May 2022