We left TENAGA’s analyst briefing with the following key takeaways: (i) Higher general expenses in 4QFY23 due to insurance premium; (ii) Genco faces tough challenges in FY24; and (iii) RP4 proposals to address 6 key areas; We cut our earnings forecasts for FY24/FY25/FY26 by 9.0%/0.3%/0.1% respectively after factoring in the unplanned outage at Manjung 4 Power Plant. Reiterate Buy on TENAGA albeit at a lower TP of RM12.40/share (previous RM12.50/share) based on DCF valuation (k: 7.2%, g: 1.6%).

Higher General Expenses in 4QFY23 Due to Insurance Premium

Recap that Tenaga Nasional Bhd (TENEGA) registered 4QFY23 results that came in below expectations. Core profit was down 47.6% QoQ due to higher general expenses (+69.0% QoQ), particularly insurance premium for power plants which are usually recognised at the end of the year. We understand from industry source that insurance premium for coal plants have increased as insurers move to restrict their insurance cover for coal projects.

Genco Faces Tough Challenges in FY24

Despite recording positive fuel margin of RM149.2mn in 4QFY23, the power generation segment (Genco) still registered loss after tax of RM198.9mn, negatively impacted by capacity rate financial (CRF) stepdown of some power plants since 3QFY22 as well as unscheduled outage at Manjung 4 Power Plant. The 1,010MW power plant was offline since early December due to severe fractures in the intermediate pressure (IP) steam turbine. According to management, they are forecasting a capacity payment loss of RM400mn for FY24. Manjung 4 is expected to restart operations earliest by the end of 2024, but in the worst case the restoration of operations could be dragged into early 2025.

Overall, Genco faces tough challenges in FY24 as a few more plants are expected to experience stepdown in CRF leading to lower capacity payment, coupled with the setback at Manjung 4 which would reduce the capacity income and increase the maintenance and repair costs for the plant.

RP4 Proposal to Address 6 Key Areas

TENAGA shed some light on their proposals for Regulatory Period (RP) 4, crafted to enable the initiatives under the National Energy Transition Roadmap (NETR). The 6 key areas of focus are (i) energy security; (ii) energy sustainability; (iii) energy affordability; (iv) stability for the industry (managing volatility in the industry); (v) customer empowerment (encourage customer participations in energy transition); and (vi) socio-economic development. RP4’s proposals are to facilitate NETR, such as to have 5GW transmission connected solar under the renewable energy zones by 2030, 8GW distribution connected solar for the rooftop solar by 2030, 2.4GW storage as required by the grid system operator by 2030, and 3GW data centres by 2030. These proposals point towards higher capex, hence higher regulated asset base and the potential return for TENAGA in RP4.

Impact

We cut our earnings forecasts for FY24/FY25/FY26 by 9.0%/0.3%/0.1% respectively after factoring in the unplanned outage at Manjung 4 Power Plant.

Valuation

Reiterate Buy on TENAGA albeit at a lower TP of RM12.40/share (previous RM12.50/share) based on DCF valuation (k: 7.2%, g: 1.6%).

Source: TA Research - 4 Mar 2024