• NEUTRAL, DCF-based TP of MYR8.60, 0% upside. It is not entirely surprising if Tenaga Nasional were to explore the listing of its power generation business, TNB Power Generation (TNB Genco) following the internal reorganisation since 2019. As it is too early to assess the quoted USD4bn price tag, TNB GenCo may need to demonstrate a strong case in growing its renewable energy (RE) portfolio given its high coal exposure.

• TNB Genco listing? Last Friday, Reuters reported that TNB aims to start the process next year for a potential USD1bn listing of TNB Genco, which may be valued at about USD4bn. The proceeds of the offering will be used to grow TNB Genco’s RE portfolio. However, Tenaga has not made a "definitive decision in relation to these potential initiatives" and is currently focused on improving its operational performance.

• It is not entirely surprising if TNB were to explore such a corporate exercise post internal reorganisation to split its core businesses into separate holding companies since 2019. The separate listing would allow investors to have choices in owning TNB’s various businesses with a different nature. Currently, TNB has total installed capacity of 24GW (45% in coal, 34% in gas and 16% in RE). Note that TNB Genco does not own the international businesses, which accounted for c.5.1GW or 21% of the total installed capacity. The power generation mix in West Malaysia (including independent power producers (IPPs)) was still dominated by coal (59%) in 2021, followed by gas (34%) and hydro (5%). TNB Genco recorded MYR19.5bn in revenue, MYR3.6bn in EBITDA (18.5% EBITDA margins) and MYR661m in PAT in FY21. While we do not have the detailed disclosure on the financials to assess, a USD4bn valuation would simply imply a trailing FY21 P/E of 26.8x – pricey, since its regional utilities peers are trading at mid-teen levels. TNB GenCo may also need to show a strong case in growing its RE businesses, as certain regional institutional funds may have restrictions on investing in utilities companies with high coal exposure. As such, we think such a plan will take at least 2-3 years to materialise. TNB is hosting its investor day on Tuesday, and we hope to obtain further clarification from management on this matter.

• PPA extension for LSS4 project. On a separate note, TNB has received the 4-year extension of a power purchase agreement (PPA) to 25 years for the 50MWac large scale solar photovoltaic plant facility at Bukit Selambau, Kedah under the Large Scale Solar 4@MEnTARI (LSS4 project). The financial closing date has been delayed to 30 Sep 2022 (from 30 Jun 2022) while the scheduled commercial operation date will be on 31 Dec 2023. The project is on track to achieve the financial close by end-September. Overall it is positive to TNB as this enables it to recoup investments more efficiently, and slightly improve the internal rate of return (IRR). We maintain our estimates as the impact to earnings and valuation is rather minimal.

Source: RHB Research - 15 Aug 2022