We left TENAGA’s analyst briefing feeling positive on the outlook of the group due to the following reasons: (i) improving cash flow and fuel margin; (ii) strong demand growth from data centre; and (iii) earnings growth from both regulated and unregulated business driven by National Energy Transition Roadmap. We make some housekeeping adjustments to our model, adjusting our FY23-FY25 earnings forecasts by 0.0%-0.2%. Reiterate Buy on TENAGA with an unchanged TP of RM11.00/share based on DCF valuation (k: 7.2%, g: 1.4%).

Improving Cash Flow and Fuel Margin

Recall that TENAGA’s 1HFY23 core profit dropped 13.4% YoY driven by higher finance costs (+9.5% YoY) and negative fuel margin (1HFY23: negative fuel margin of RM565.7mn vs 1HFY22: positive fuel margin of RM257.0mn). Following the downtrend and stabilisation of coal prices (1QFY23: USD241.4/MT; 2QFY23: USD171.5/MT; 3QFY23 QTD: USD150.0/MT), TENAGA’s ICPT receivables is expected to improve in the future. The group’s ICPT receivables as at 2QFY23 stood at RM8.9bn, 35.5% QoQ decline from RM13.8bn in 1QFY23 and nearly half of RM16.9bn in 4QFY22. TENAGA will recover RM4.7bn of ICPT cost from the government in 2HFY23 (1HFY23: RM10.4bn, fully recovered; forecast for 1HFY24: RM7.0bn). These developments would ease TENAGA’s cash flow situation and contribute to better earnings in the near term as the group would gradually reduce its gearing and register lower finance costs. Furthermore, the stabilisation of coal prices should improve the group’s negative fuel margin for the power generation business. We expect the power generation business to return to the black in 2HFY23.

Demand Growth from Data Centres

As Malaysia rapidly emerges as the data centre hub in Southeast Asia, TENAGA views data centre as the key driver of demand growth in the future. According to management, TENAGA’s current generation capacity is c.11kMW with c.40% reserve margin, more than enough to accommodate the expected rapid increase in demand from data centres set up across the nation. In 2023 alone, the pipeline data centres amounted to c.2kMW and the group projects that the potential demand to be >4.3kMW by 2035. Management believes this would relieve pressure on tariff hike from RP4 onwards as data centres run 24 hours a day and would optimise the usage of the infrastructures, hence contributing to higher revenue. We believe the surging demand from data centres would be the key driver for earnings growth in the short to medium term as higher regulated asset base is necessary to accommodate the higher demand from data centres.

Beneficiary of National Energy Transition Roadmap

TENAGA is the prime beneficiary of the National Energy Transition Roadmap (NETR) for its role in: (i) championing hybrid hydro-floating solar photovoltaic (HHFS) projects, with potential capacity of 2.5kMW by 2040; (ii) building five 100MW large scale solar parks; (iii) rooftop solar business led by GSPARX. These projects are expected to contribute significantly to TENAGA’s bottomline for its unregulated business. Furthermore, as the regulated asset base for its regulated business increases to cater for the increasing demand for renewable energy following Malaysia’s emergence as the renewable energy exchange hub under NETR, we see the return for this segment to increase in tandem. Note that TENAGA plans to invest c.RM89bn between 2025 and 2030 where c.RM35bn will be utilised for energy transition grid upgrade while the remaining for non-energy transition related grid investment.

Impact

We make some housekeeping adjustments to our model, adjusting our FY23- FY25 earnings forecasts by 0.0%-0.2%.

Valuation

Reiterate Buy on TENAGA with an unchanged TP of RM11.00/share based on DCF valuation (k: 7.2%, g: 1.4%).

Source: TA Research - 5 Sept 2023