• Stay NEUTRAL, with new TP of MYR9.00 from MYR8.60, 1% upside. We walked away from Tenaga Nasional’s Investor Day feeling more positive as the company demonstrated its commitment to its sustainability agenda. Despite ambitious targets being revealed, TNB still needs to accelerate its renewable energy (RE) capacity to meet the 8.3GW target by 2025. The absorption of carbon capture, utilisation and storage (CCUS) cost, in our view, may dampen its returns in the medium term.

• Ambitious plans revealed. TNB has revealed various plans within key divisions during its Investor Day. Overall EBIT is projected to grow by 140% or 3% CAGR from MYR8bn in FY21 to MYR19bn by 2050, of which 58% is from future generation and new green business, with the remaining from the grid business. Regulated asset base (RAB) for grid and distribution network is projected to grow from the current MYR64bn to c.MYR100bn by 2050. All in, TNB will require investment of MYR10-20bn pa over the next 30 years.

• Fast track sustainability agenda to expedite energy transition but CCUS cost is a concern. TNB Genco currently owns 53% of the domestic generation market share, totalling 14GW contracted capacity. Early retirement of selected coal plants, followed by gas repowering could enable TNB to be coal free by early 2040s. CCUS technologies are also being explored to apply on coal plants with relatively longer PPA duration. Management guided that CCUS could cost c.MYR100m for 100MW capacity, and based on current discussions, it is unlikely TNB will pass through such cost. As such, the company may have to absorb such cost with options such as paring down the coal plant’s equity stake. Meanwhile, TNB Genco will also focus on international gas and hydro ventures, predominantly in the ASEAN region. Green hydrogen is another long term growth factor, with a 22% target supply market share by 2050. Management highlighted the listing plan might at least take 2-3 years to materialise.

• New energy division (NED). The NED will continue to expand the RE portfolio (solar and wind, excluding hydro) domestically and internationally, with an interim target of 7.2GW by 2030 and 14.3GW by 2050 from the current majority owned capacity of 0.7GW. Apart from the current focus markets, six new focus markets – France, Spain, Ireland, Taiwan, Australia and Korea have been identified. We understand that NED is pursuing a deal flow pipeline of c.3.6GW, of which 85% is development assets, with the remaining being operational assets.

• We increase our ESG score to 2.8 from 2.6 following a much clearer roadmap being disclosed. As such, our DCF-based TP is lifted to MYR9.00, with a lower discount rate of 4%.

Source: RHB Research - 17 Aug 2022