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Analysts positive on TNB’s earnings outlook, data centres to drive immediate growth

Publish date: Wed, 29 Nov 2023, 03:33 PM

KUALA LUMPUR (Nov 29): Analysts hold a positive view of Tenaga Nasional Bhd’s (TNB) prospects, in anticipation that electricity demand over the immediate term will be fuelled by the expected influx of new data centres in Malaysia.

Kenanga Research said six new data centres which have so far been completed will consume 292 megawatts (MW) of electricity. In addition, the research house added that TNB has inked electricity supply agreements to supply 2,000MW to eight data centres in total.

“It (TNB) projects a total potential demand of 7,000MW of electricity from data centres by 2035,” Kenanga said in a note on Wednesday (Nov 29) after TNB’s briefing on the group’s third quarter ended Sept 30, 2023 (3QFY2023) results.

According to HLIB Research, the increased consumption stemming from data centres is envisioned to cover TNB’s intensive investment capital expenditure for its renewable energy (RE) plants as well as upgrading its transmission and grid.

“It was indicated that the government is studying new tariff structures (including a higher rate for RE and export) and accelerating data centre development in order to cover TNB’s intensive investment capex,” it said.

“The single buyer entity (entrusted to manage planning and procurement of electricity in Peninsular Malaysia) will be taken out from TNB group, but TNB will novate the responsibility and lease liabilities of power purchase agreements (PPAs) to the single buyer,” it added.

TNB, as Malaysia’s largest utilities group, is leveraging well onto the National Energy Transition Roadmap (NETR) with progress on its 2.5-gigawatt hybrid hydro-floating solar photovoltaic (PV) projects, five 100MW large-scale solar parks and a 4.5MW solar PV system for Sime Darby Property Bhd’s new housing development project in City Elmina.

“Under the NETR, we expect TNB to accelerate its energy transitioning plan and further diversify its earnings base,” HLIB said, adding it maintains its “buy” recommendation with an unchanged discounted cash flow to equity-derived target price (TP) of RM11.

Similarly, Kenanga maintained its “outperform” call on TNB with a discounted cash flow-derived TP of RM11.45.  

“We continue to like TNB for: (i) its dominance in power generation, transmission and distribution in Malaysia, (ii) its defensive earnings backed a resilient domestic economy and assets that are largely regulated, and (iii) its heavyweight index-linked stock status. In addition, its dividend yield is decent at 3%-4%,” Kenanga added.

However, HLIB noted that TNB's management has guided that the negative fuel margin - which implies actual fuel cost being higher than the applicable fuel prices under the current Imbalance Cost Pass-Through (ICPT) mechanism cycle - will continue to impact its 4QFY2023 performance, resulting in an estimated total of RM900 million in fuel margin variations for FY2023.

It is understood that ICPT will be adjusted in its next six-month cycle to reflect changes in actual fuel costs in the prior cycle.

“Depending on coal price movements, the impact could flow into FY2024 as well,” HLIB said.

However, Kenanga opined that the negative fuel margin is unlikely to recur in FY2024 given coal prices stabilising - having moderated to US$138.62 (RM644.24) per metric ton (MT) in September 2023 from US$377.59 per MT a year ago.

“On a brighter note, easing coal prices will bring down ICPT receivables, resulting in lower working capital requirements and hence interest expenses and better earnings,” it added.

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