• Keep NEUTRAL and MYR9 TP, 8% upside. Tenaga Nasional’s second combined cycle gas-fired power plant (2,100MW) with potential hydrogen- fired combustion capability in 2031 also somewhat matches the projected capacity addition laid out by Energy Commission. That said, the project’s IRR may not be that exciting and could be just in the range of 6-7%. Sustainability wise, it is targeted to achieve annual emissions avoidance of 4.7m tCO2e, which is equivalent to c.12% of TNB’s total greenhouse gas (GHG) emissions in FY21.

• To develop a 2,100MW combined cycle power plant. Last Friday, TNB announced that it has received a Letter of Intent from the Ministry of Energy & Natural Resources for the development of a 2,100MW combined cycle gas-fired power plant with hydrogen-fired capability in Kapar. This greenfield project will be constructed on the company’s own land, located to the north of the existing Sultan Salahuddin Abdul Aziz Power Station. The development of the project will be carried out by TNB in collaboration with Widad Business Group via a JV with an equity stake split of 60:40. The plant is scheduled for Commercial operation date in 2031.

• On a sustainability pathway. This project marks TNB’s second combined cycle gas-fired power plant with potential hydrogen-fired combustion capability that it has secured this year. It is also aligned with TNB’s Net Zero Emissions Aspiration by 2050. The 2,100MW thermal addition in 2031 also somewhat matches the projected capacity addition laid out by Energy Commission in the Peninsular Malaysia Development Generation Plan 2020 (2021-2039). We are guided that the total project cost is estimated at MYR9.5bn, which implies c.MYR4.5m/MW for such a project. At the same time, it is estimated to generate average gross EBIT of MYR400m pa (net MYR240m to TNB or c.2.7% of our FY23 estimate). The project will form part of the company’s strategy to grow its EBIT by 140% or 3% CAGR from MYR8bn in FY21 to MYR19bn by 2050. It is also within its annual capex guidance of MYR10-20bn over the next 30 years. Sustainability wise, this plant is targeted to achieve annual emissions avoidance of 4.7m tCO2e, which is equivalent to c.12% of TNB’s total GHG emissions in FY21.

• Maintain earnings estimates and TP, with a 4% ESG discount based on TNB’s ESG score of 2.8. We also retain our NEUTRAL call on this stock. Based on our back-of-envelope calculation, the project IRR may not be that exciting and could be just in the range of 6-7%. For now, we would also want to maintain our terminal growth rate at 1% vs TNB’s EBIT CAGR of 3%, as we are well aware of the potential impact of earnings losses following the expiry of coal plants.

Source: RHB Research - 25 Oct 2022