• NEUTRAL, new MYR10.40 TP from MYR10.20, 7% upside with c.5% FY24F yield. Tenaga Nasional’s 1Q23 core profit is in line – up 9% YoY, thanks to lower tax expenses. Quarterly operating cash flow was healthy, at MYR4.4bn (-17% QoQ, +3.0x) while net gearing was largely unchanged at 0.83x. Meanwhile, the estimated total imbalance cost pass-through (ICPT) to be recovered in 2H is MYR9bn, based on current fuel prices. 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 (1Q23: 3.9GW).

• At 20% of our and Street FY23 estimates, the company’s 1Q23 core profit of MYR968m (+9% YoY, +74% QoQ) is in line. Note that our numbers have imputed MFRS 16 changes (1Q23: -MYR181m, 1Q22: -MYR250m).

• Sterling 1Q23 core earnings growth was mainly led by lower operating expenses. The demand for electricity in West Malaysia dropped by 1% QoQ in 1Q23, as a result of lower consumption from the commercial and industrial segments – which masked the hike in domestic consumption. YoY, core earnings improved by 9%, on lower tax expenses with a higher reinvestment allowance and the absence of the one-off prosperity tax offsetting higher finance costs.

• Outlook. Electricity demand rose in tandem with GDP growth in 1Q23 (+0.5% YoY). We saw a rise in the gas generation mix to 39.5% (4Q22: 36.7%) at the expense of the coal mix, which in turn dropped to 53.70% (4Q22: 55.1%). TNB’s operating cash flow remained healthy, at MYR4.4bn in 1Q23 (-17% QoQ, +3.0x) while its net gearing was largely unchanged at 0.83x. Meanwhile, the total ICPT cost to be recovered in 2H23 is estimated at MYR9bn, based on the current fuel price trend. 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 predominantly within ASEAN. Domestically, TNB continues to expand the EV ecosystem and increase its RE penetration.

• We maintain our earnings estimates but our TP rises to MYR10.40, as we rolled over our valuation base year to FY24F. Our TP also factors in a higher ESG discount of 10%, based on our revised ESG score of 2.5 (from 2.8). Foreign shareholdings fell slightly to 12.9% as of 1Q23 (4Q22: 13.1%). Downside risks: Higher operating costs and greater-than-expected plant outages.

• ESG framework update. As there is now greater focus on the E pillar on critical climate change issues, we tweaked our ESG weightage. Henceforth, we assign a 50% weightage to the E pillar, followed by 25% each to the S and G pillars. See our 2 May thematic research for more details.

Source: RHB Research - 30 May 2023