• Keep BUY, TP drops to MYR11.80 from MYR12, 18% upside with c.5%FY24F yield. Tenaga Nasional’s 9M23 core profit missed expectations,being dragged by negative fuel margins and weaker JV& associatecontributions. We continue to like TNB for being a key National EnergyTransition Roadmap (NETR) beneficiary, largely from the potential earningsupside from higher transmission & distribution (T&D) assets and a potentialstrong ramp-up in the domestic renewable energy (RE) presence.

• At 61% and 64% of our and Street FY23 estimates, TNB’s 9M23 coreprofit of MYR2.6bn (-22% YoY) fell below expectations due to negative fuelmargins and weaker JV& associate contributions. Note that our numbershave imputed MFRS 16 changes (9M23: -MYR529m, 9M22: -MYR701m).

• 3Q23 core earnings dipped by 1% QoQ to MYR819m, as the weakerdomestic power generation arm – as a result of its negative fuel margin –was largely offset by lower tax expenses and better JV & associatecontributions. This also came despite the demand for electricity in WestMalaysia improving by 1% QoQ in 3Q23, driven by higher commercial andindustrial consumption, which in turn masked the weaker domesticconsumption. 9M23 core earnings contracted by 22% YoY, dragged by aweaker domestic generation arm which sank into a loss of MYR328m(9M22: MYR1.1bn profit), no thanks to the negative fuel margin impact. Thiswas cushioned by lower tax expenses on the back of a higher reinvestmentallowance claim and the absence of the one-off prosperity tax levied lastyear.

• Outlook. Electricity demand rose in tandem with GDP growth in 3Q23(+3.6% YoY). We saw a slight rise in the gas-powered generation mix to35.1% (2Q23: 34.0%) at the expense of the coal-powered generation mix,which in turn dropped to 58.6% (2Q23: 60.1%). Operating cash flowremained solid at MYR5.9bn (MYR2.1bn in 2Q22) in 3Q23, which lowerednet gearing to 0.71x from 0.72x in 2Q23. Its current RE capacity is at 4.1GW(18% of total capacity). According to an article in The Edge, TNB’s T&Dassets are able to support additional 12GW of new solar power generationcapacity and TNB has identified 12 locations for energy farming, with eachsite in the transmission network able to handle up to 500MW capacity aswell as hundreds of other sites for smaller projects (10-30MW).

• We cut FY23-25F earnings estimates by 6-12% to account for thenegative fuel margins and lower JV & associate contributions. As such, wetrim our TP to MYR11.80 accordingly, with the incorporation of an ESGdiscount of 6% as our ESG score for the company is 2.7 out of 4. Foreignshareholdings improved to 12.9% as of 3Q23 (2Q23: 12.5%). Downsiderisks: Higher operating costs and greater-than-expected plant outages.

Source: RHB Securities Research - 27 Nov 2023