We left TENAGA’s analyst briefing with the following key takeaways: (i) Negative fuel margin to completely ease in FY24; (ii) Multilateral collaboration is needed in establishing the ASEAN power grid; (iii) Carving out of Single Buyer a step towards independence in managing exchange hub; and (iv) TENAGA recently submitted Regulatory Period 4 proposals. No change to our earnings forecasts. Reiterate Buy with an unchanged TP of RM11.00/share based on DCF valuation (k: 7.2%, g: 1.4%).

Negative Fuel Margin to Completely Ease in FY24

In 9MFY23, Tenaga Nasional Berhad (TENAGA) was impacted by negative fuel margin of RM767.9mn (FY22: positive fuel margin of RM1.1bn). The group expects to continue suffering from negative fuel margin in 4QFY23, bringing the negative fuel margin in FY23 to c.RM900mn. Nonetheless, provided coal prices remain stable at current levels, management guided that TENAGA is not expected to experience any negative fuel margin in FY24.

Multilateral Collaboration in Establishing the ASEAN Power Grid

In the group’s move towards establishing Malaysia as the centrepiece of ASEAN power grid, TENAGA is collaborating with PT Perusahaan Listrik Negara (PLN) and the ASEAN Centre for Energy (ACE) to undertake a feasibility study to establish interconnection between Sumatra, Indonesia and Malaysia. Additionally, TENAGA is also assessing the technical feasibility of a second power interconnection linking Peninsular Malaysia and Singapore in partnership with Singapore’s SP Power Assets. Currently, Malaysia has one interconnection linking Peninsular Malaysia and Thailand, and another interconnection linking Peninsular Malaysia and Singapore. The establishment of ASEAN power grid bodes well for TENAGA as this allows the group to collect wheeling charges for transmission of electricity across Malaysia.

Carving Out of Single Buyer a Step Towards Independence in Managing Exchange Hub

According to the Natural Resources, Environment and Climate Change Minister Nik Nazmi, the Single Buyer (SB) will be carved out of TENAGA and will be responsible in managing the energy exchange hub. SB is a ring-fenced entity within TENAGA that operates in a cost pass through manner via the incentivebased regulation framework. Management views the carving out positively as this is a major step towards independence in managing the energy exchange hub, which would provide confidence to investors and users of the exchange hub. For now, the ownership, asset value and mechanism of carving out SB has yet to be finalised.

Submitted Regulatory Period 4 Proposal

TENAGA has submitted the proposals for Regulatory Period 4 (RP4) to the government. RP 4 will be effective from 1 Jan 2025 to 31 Dec 2027. Management expects the new energy exchange hub to be operational during RP4. The exchange hub’s main role would be to encourage trading of energy and will be as transparent as possible to encourage an open electricity market in Malaysia. The exchange hub is expected to start with the opening of export market, likely in 2024, while the opening of domestic market may take longer due to difficulty in removing the subsidies involved.

Impact

No Change to Our Earnings Forecasts

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 - 29 Nov 2023