• BUY, TP drops to MYR12 from MYR12.40, 20% upside with c.5% FY24F yield. Tenaga Nasional’s 1H23 core profit missed expectations, being dragged by negative fuel margins and weaker JV& associate contributions. Operating cash flow continued to strengthen (+1.7x) to MYR11.9bn in 2Q23, lowering its net gearing to 0.72x from 0.83x in 1Q23. We believe TNB is a key National Energy Transition Roadmap (NETR) beneficiary, largely from the potential earnings upside from higher transmission & distribution (T&D) assets and a potential strong ramp-up in the domestic RE presence.

• At 38% and 39% of our and Street FY23 estimates, the company’s 1H23 core profit of MYR1.8bn (-11% YoY) fell below expectations due to negative fuel margins and weaker JV& associate contributions. Note that our numbers have imputed MFRS 16 changes (1H23: -MYR355m, 1H22: -MYR474m).

• 2Q23 core earnings fell 14% to MYR828m, largely due to a weaker domestic power generation arm, higher tax expenses and weaker JV & associate contributions. This also came despite the demand for electricity in West Malaysia increasing by 7% QoQ in 2Q23, as a result of higher consumption from the commercial and industrial segments amidst flattish domestic consumption. 1H23 core earnings contracted by 11% YoY, dragged by a weaker domestic generation arm which sank into a loss of MYR194m (1H22: MYR807m profit), no thanks to the negative fuel margin impact.

• Outlook. Electricity demand rose in tandem with GDP growth in 2Q23 (+3.3% YoY), with new peak demand of 19,716MW recorded in May. We saw a rise in the coal generation mix to 60.1% (1Q23: 53.7%) at the expense of the gas mix, which in turn dropped to 34% (1Q23: 39.5%). TNB’s operating cash flow continued to strengthen (+1.7x) to MYR11.9bn in 2Q23, lowering its net gearing to 0.72x from 0.83x in 1Q23. Current RE capacity is at 3.9GW (17% of total capacity). We believe TNB is one of the key beneficiaries of the NETR – largely from the potential earnings upside from higher T&D assets (including wheeling charges) and a potential strong ramp-up in its domestic RE presence. TNB also appears to be the biggest winner in the recently awarded corporate green power programme (CGPP).

• We cut our FY23-25F earnings estimates by 11-5% to account for the negative fuel margins and lower JV & associate contributions. As such, we trim our TP to MYR12 accordingly, with the incorporation of an ESG discount of 6% as our ESG score for the company is 2.7 out of 4. Foreign shareholdings fell slightly to 12.5% as of 2Q23 (1Q23: 12.9%). Downside risks: Higher operating costs and greater-than-expected plant outages.

Source: RHB Securities Research - 28 Aug 2023