Review

• Tenaga Nasional Bhd’s (TENAGA) 1QFY24 core net profit of RM970.6mn came in within expectations.

• QoQ: Excluding impact of foreign exchange (1QFY24: -RM171.3mn vs 4QFY23: +RM151.0mn), 1QFY24 core profit more than doubled QoQ due to lower non-fuel operating expenses (-20.0% QoQ), including (i) maintenance costs (-20.8% QoQ); (ii) TENAGA’s general expenses (-41.7% QoQ) as insurance premium is usually recognised at the end of the year; and (iii) subsidiary’s general expenses (-14.8% QoQ). This was despite higher tax expenses (+135.4% QoQ) as there was higher capital allowance and reinvestment allowance in 4QFY23. Dragged by negative fuel margin of RM25.8mn and capacity payment loss of RM140.8mn from unscheduled outage at Manjung 4 Power Plant, Genco registered LAT of RM80.4mn (4QFY23: LAT of RM198.8mn). The results were commendable considering that the segment registered positive fuel margin of RM149.2mn in 4QFY23.

• YoY: 1QFY24 core profit grew 6.2% YoY on the back (i) 8.0% growth in revenue in tandem with 9.6% growth in electricity demand (mainly from commercial sector where data centre is the main driver, and domestic sector); (ii) higher finance income (+58.4% YoY) from fixed deposits; and (iii) lower finance cost (-8.3% YoY) as borrowing decreases. The latter 2 are due to better cash flow following the drop in coal prices, allowing TENAGA to pare down its borrowings previously used to fund for fuel purchases.

Impact

• After incorporating FY23 audited numbers, we adjust our FY24-FY26 earnings forecasts by 0.1%-0.2%.

Outlook

• In May this year, TENAGA fully recovered the RM4.7bn ICPT cost recovery for 2H2023 from the government. The continuous recovery of ICPT has helped to reduce the group’s ICPT receivables from RM16.9bn as at FY22 to RM4.7bn as at 4QFY23, hence improving its cash flow position. This is evident in the latest result, improving earnings in the process by lowering the finance cost from lower borrowings. Moving forward, the ICPT receivable is expected to continue trending lower as the government moves towards electricity subsidy rationalisation.

• Malaysia recently set up the Energy Exchange Malaysia (ENEGEM) for trading in green electricity supply to Singapore. This is a small but important step forward before Malaysia scales up the cross-border sale of renewable energy to Singapore where the electricity price is much higher. TENAGA should be the main beneficiary as the group can increase its interconnection grid with Singapore in the future and hence collect returns from utilisation of the grid. It is uncertain whether the new interconnection will be part of TENAGA’s regulated asset base.

Valuation

• We raise our terminal growth rate for TENAGA from 1.6% to 1.8% as we are more confident in TENAGA’s long-term growth in view of the NETR. Reiterate Buy with a higher TP of RM14.50/share (previous: RM12.40/share) based on DCF valuation (k: 7.0%, g: 1.8%).

Source: TA Research - 4 Jun 2024