We left TENAGA’s analyst briefing with the following key takeaways: (i) TPA is a positive for the industry; (ii) the data centre remains the main driver of demand growth; and (iii) the group is working to bring Manjung 4 back online by end-2024. No change to earnings forecasts. Reiterate Buy with unchanged TP of RM14.50/share based on DCF valuation (k: 7.0%, g: 1.8%).

TPA a Positive for the Industry

Management believes that the liberalisation of the power generation segment via third party access (TPA) where independent power producers (IPP) can sell directly to customers is a boon to the industry. TENAGA expects TPA to encourage more renewable energy (RE) generation, particularly solar energy. In our opinion, the tariff negotiated with customers will likely be more favourable for asset owners compared with those of LSS projects, which is done via competitive bidding. Regardless of the TPA framework and whether non-RE is involved in the TPA, IPPs will have to utilise TENAGA’s transmission and distribution lines, improving the utilisation of the grid and necessitating more investment into the grids. This points towards higher regulated asset base and likely better regulated return for TENAGA.

Data Centre Remains the Main Driver of Demand Growth

In 1QCY24, TENAGA completed 2 data centre projects, with a total energy demand of c.535MW. A total of 9 data centre projects are expected to be completed in 2024, amounting to c.700MW energy demand. The group expects to sign an electricity supply agreement (ESA) for another 10 projects in 2024, with c.2000MW total energy demand. These data centres are gradually increasing their energy consumption in a stepped ladder fashion after being connected to the grid, hence progressively driving the electricity demand. This is evident in 1QFY24 results, where the Commercial segment registered 11.2% YoY growth in electricity demand. Despite the 9.6% YoY growth in demand for 1QFY24, TENAGA is maintaining its demand growth forecast for 2024 at 2.5%- 3.0%. In fact, management expects the Regulatory Period 4 (RP4) electricity demand forecast to be similar to the group’s growth forecast for 2024. This is much higher than the 1.7% guided growth under RP3.

Working to Bring Manjung 4 Back Online by End-2024

Recap that Manjung 4 Power Plant experienced an unscheduled outage since December 2023. TENAGA is working to bring the power plant back online by end-2024. The estimated capacity payment loss is still c.RM400mn as previously guided, and the group is working closely with the insurer on the insurance claims.

Impact

No Change to Earnings Forecasts.

Valuation

Reiterate Buy on TENAGA with unchanged TP of RM14.50/share based on DCF valuation (k: 7.0%, g: 1.8%). NETR, growth of data centre and electrification

Source: TA Research - 5 Jun 2024