• Maintain BUY with new MYR12.40 from MYR10.40 TP, 29% upside and c.5% FY24F yield. We believe Tenaga Nasional is one of the key beneficiaries from the National Energy Transition Roadmap (NETR), largely from the potential earnings upside from higher transmission and distribution (T&D) assets (including wheeling charges) as well as the potential strong ramp-up in domestic RE presence.

• NETR beneficiary. TNB has planned MYR35bn investments in 2025-30 for the Grid of the Future. This translates to MYR5.8bn pa, which is c.5.8x higher than average energy transition-related capex spent/allocated in 2018-24. Although it is unclear if the entire capex will be tabulated as regulated capex under the Incentive Based Regulation (IBR) scheme, it will still provide certain earnings certainty in the future. With the potential expedition of RE capacity in Malaysia, a grid upgrade charge and wheeling charges are likely to be tabulated under a new scheme for energy export. This is to compensate TNB for utilising the T&D assets. The additional grid upgrade charge collected will be used to improve grid infrastructure, given that additional RE supply is expected to enter the grid. We are guided that such charges will be seen as additional income for TNB and the current IBR mechanism is likely to remain unaffected. Note that YTLP PowerSeraya was awarded a two-year electricity license to import 100MW from TNB in Malaysia via the newly upgraded interconnector. We believe this pilot project is likely to adopt the similar wheeling charges mechanism. Under NETR, assuming a total capacity of 1GW of solar plants is being established in Malaysia for energy export to Singapore, this could provide total electricity supply of 1.3bn kWh per annum. If wheeling charges are set at 10sen/kWh, TNB is able to collect MYR128m per annum.

• Ramping up domestic RE presence. Out of the 10 flagship projects, we understand that TNB is likely to be involved in at least 3GW worth of RE projects (500MW solar parks and 2.5GW hybrid hydro floating solar projects) announced. Although TNB may not fully own the equity stake of these projects, we still expect its total RE gross capacity to escalate from 3.9GW as of 1Q23 to stand a chance of hitting its 8.3GW target by 2025.

• Keep BUY. While keeping our earnings estimates, we increased our DCF- based TP to MYR12.40 (implied 14x FY24 P/E) after lifting our terminal growth rate from 1% to 1.5% to factor potential long-term earnings upside from both additional wheeling charges as well as higher RE demand. Our TP also factors in a lower ESG discount of 6%, based on our higher ESG score of 2.7 (from 2.5) with the anticipation of domestic RE ramp up under NETR. Valuation wise, the stock is currently trading at 10.8x FY24F P/E, which is below its 5-year mean of 11.8x. Downside risks: Higher operating costs and greater-than-expected plant outages.

Source: RHB Research - 28 Jul 2023