• NEUTRAL, new MYR10.20 TP from MYR9.60, 6% upside with c.5% FY23F yield. Tenaga Nasional’s FY22 core profit missed our expectations due to higher MFRS 16 impact. There was a continuous improvement in cash flow in 4Q22, and TNB will recover the imbalance cost pass-through (ICPT) cost of MYR16.2bn – through ICPT surcharges to non-domestic users as well as MYR10.4bn from the Government in 1H23. TNB, in our view, has to pursue its expansion in renewable energy (RE) more aggressively in order to achieve its 8.3GW target by 2025 (4Q22: 3.9GW).

• At 87% and 90% of our and Street FY22 estimates, Tenaga Nasional’s FY22 core profit of MYR3.9bn (-10% YoY) fell below our expectations due to higher than expected MFRS 16 impact (depreciation and finance costs). Note that our numbers have imputed MFRS 16 movements (FY22: -MYR920m, FY21: -MYR621m).

• 4Q22 core earnings plunged by 58% QoQ to MYR557bn on a weaker domestic generation segment and higher opex. West Malaysia electricity demand contracted by 3% QoQ in 4Q22 as a result of lower consumption across all three key segments. Despite revenue rising 6% YoY on electricity demand (excluding higher ICPT recovery, which is now no longer classified as revenue effective 4Q22), FY22 core earnings fell 10% YoY on higher tax expenses and MFRS 16 net movements (seen from higher finance costs and depreciation charges) masking stronger generation profit.

• Outlook. Electricity demand rose in tandem with GDP in FY22 (+6% YoY). The overall generation mix was fairly unchanged QoQ, with a slight rise in gas generation to 36.7% (3Q22: 35.8%) at the expense of the coal mix, which dropped to 55.1% (3Q22: 56.5%). Operating cash flow improved by 1.5x QoQ in 4Q22, to total MYR9.4bn (-30% YoY) in FY22. As such, net gearing dipped to 0.87x in 4Q22 from 0.88x in 3Q22. TNB will recover the ICPT cost of MYR16.2bn through ICPT surcharges to non-domestic users (at 3.7sen/kWh and 20sen/kWh) as well as MYR10.4bn from the Government in 1H23. MYR4bn was received in January. The remainder should be cleared in five equal instalments. Total ICPT cost to be recovered in 2H23 is estimated at MYR12bn, based on the current fuel price. Current RE capacity is at 3.9GW (17% of total capacity). This still lags behind its 8.3GW target by 2025, but we understand that the new energy division is pursuing opportunities in the pipeline of 4.4GW, expanding its focus beyond ASEAN into the Asia-Pacific (South Korea, Taiwan and Australia).

• We cut earnings estimates by 5% after imputing the higher MFRS 16 impact. Our TP rises to MYR10.20, with a lower discount of 10% (from 20%) to intrinsic value and an unchanged 4% ESG discount, premised on the easing of regulatory risks to uphold the ICPT framework. Foreign shareholdings improved to 13.1% as of 4Q22 (3Q22: 12.6%). Downside risks: Higher operating costs and greater-than-expected plant outages.

Source: RHB Research - 28 Feb 2023