• D/G to NEUTRAL from Buy, still MYR11.80 TP, 3% upside with c.5% FY24F yield. FY23 results missed expectations on higher operating costs. Although we like Tenaga Nasional for being a key National Energy Transition Roadmap or NETR beneficiary, we believe the stock is currently fairly valued, trading at 16x FY24 P/E, which is beyond its +2 SD from its 5-year mean after a good run of 14% YTD. We advocate investors to revisit at better entry levels.

• At 85% and 90% of our and Street’s FY23 estimates, TNB’s FY23 core earnings of MYR3.1bn (-20% YoY) fell below expectations on higher-than- expected non-fuel operating costs. Note: Our numbers have imputed Malaysian Financial Reporting Standard 16 changes (FY23: -MYR674m, FY22: -MYR920m).

• 4Q23 core profit fell by 36% QoQ to MYR523m, dragged by higher opex masking its better domestic power generation arm – as a result of its positive fuel margins and lower finance costs. FY23 core earnings contracted by 20% YoY, dragged by a weaker domestic generation arm that sank into a loss of MYR527m (FY22: MYR861m profit), no thanks to the negative fuel margins impact. This was cushioned by lower tax expenses on higher reinvestment allowance claims and absence of the one-off prosperity tax levied last year.

• Outlook. Electricity demand rose in tandem with GDP growth in FY23 (+3.6% YoY), largely driven by stronger commercial (+7.6%) and domestic (+6.7%) segments offsetting a weaker industrial division (-2.6%). We saw a slight rise in the gas-powered generation mix to 38.2% (3Q23: 35.0%) at the expense of the coal-powered generation mix, which in turn dropped to 55.6% (3Q23: 58.5%). Operating cash flow continued to strengthen to MYR10bn in 4Q23 (3Q23: MYR5.9bn), which lowered net gearing to 0.69x (3Q23: 0.71x). TNB’s current renewable energy (RE) capacity is at 4.3GW (20% of total capacity). The current committed pipeline suggests total RE capacity to reach 4.8GW by 2025 and TNB would have to pursue either M&A or greenfield projects more aggressively to achieve its 8.3GW target. The group is still confident of achieving the 8.3GW by 2025 target. TNB submitted its Regulatory Period (RP) 4 proposal (2025-2027) to the regulator at the end of last year. The outcome is likely to be known by end 2024.

• We cut FY24F earnings by 9% to account for a higher cost base. Despite the earnings cut, our TP remains unchanged at MYR11.80 following latest net debt update. We also ascribed an ESG discount of 6%, as TNB’s 2.7 ESG score is below the 3.0 country median. Foreign shareholdings fell by 0.1% MoM to 12.4% as of January. Downside risks: Higher operating costs and greater- than-expected plant outages. The opposite represents the upside risks.

Source: RHB Research - 28 Feb 2024