• Keep BUY and MYR16.10 TP, 13% upside and c.4% FY25F yield. Post site visit, we believe Vantage RE (Vantage) will remain one of Tenaga Nasional’s major renewable energy (RE) key growth drivers internationally, while also strengthening its internal capabilities via secondments and knowledge- sharing sessions. Apart from health and safety policies, environmental assessments, biodiversity development proposals and constant stakeholder engagement are in place for the company’s solar and wind projects.

• Technical visit to Vantage. Last week, TNB hosted a technical visit to its operating unit, Vantage in the UK where we had a meeting with the Vantage management team and visited two RE assets, Blyth offshore windfarm and Bunkers Hill solar farm. Established in 2021, Vantage has 92 operational sites in the UK and Ireland with a total combined gross operational capacity of 806.1MW (accounted for 19% of TNB’s RE portfolio), 101.7MW in construction and 307.6MW in development. The bulk of these assets is in solar (61%), followed by onshore wind (20%), battery energy storage system (BESS), (11%) and offshore wind (8%). Vantage RE aims to achieve >2GW in 2030 from current’s 1.2GW. We understand that the RE assets generally have c.15-year corporate power purchase agreement (PPA) signed. Tariffs are either at fixed or floating rates, which could allow Vantage RE to have a certain level of revenue visibility while capitalising on higher energy prices at different times. Additionally, the majority of Vantage’s current RE assets have long term support schemes in place. We are guided that these subsidies are important and could contribute >50% of Vantage revenue in the medium term. As such, these RE assets typically fetch high single-digit returns, with a slight premium for wind assuming a useful life of c.30 years.

• Financials. Vantage’s topline has demonstrated strong growth from GBP34m in FY21 to GBP139m in FY23. EBITDA margin has been in the range of 69-75% in FY21-23. The relatively stronger EBITDA margin of 75% recorded in FY22 was largely driven by the Russia-Ukraine-led spike in energy prices. Meanwhile, shareholders’ loan arrangement given from TNB to Vantage also facilitates subsequent cash repatriation and >1/3 of total TNB investments have been distributed to date. We are guided that Vantage’s bottomline is still in the red as a result of the sizeable finance cost payment. Therefore, Vantage’s earnings contribution may not be significant to TNB as long as the similar financial structure continues to be adopted, in our view.

• We maintain our earnings estimates and our TP at MY16.10 (with a 6% ESG discount). Our TP implies 1.5x FY25F P/BV (+1SD from its 10-year mean). TNB should benefit from the continuous upgrade in transmission and distribution assets, where energy demand can be anchored by the mushrooming data centre development. Downside risks: Higher operating costs and greater-than-expected plant outages.

Source: RHB Research - 9 Jul 2024