We left TENAGA’s analyst briefing with the following key takeaways: (i) Earnings recovery for Genco looks sustainable premised on receding negative fuel margin; (ii) Demand growth looks set to expand further with huge incoming data centre capacity; (iii) RP4 decision towards year-end could be a key catalyst premised on an expected capex expansion to accommodate influx of RE and increased power demand. No change to earnings forecasts but we turn more constructive on TENAGA’s medium-tolong term prospects underpinned by structural data centre-driven demand growth and strong policy backing for the energy transition. Upgrade TENAGA to Buy from Hold at a higher TP of RM17.30/share based on DCF valuation (k: 7.0%, g: 2.0%)

Earnings Recovery for Genco

To recap, TENAGA’s 1H24 core earnings saw significant improvement of +32% YoY thanks to a recovery at Genco, which returned to the black with a PAT of RM319.0mn from an LAT of RM250.8mn last year. This was mainly driven by lower negative fuel margin of RM69.8mn in 1HFY24 compared to some RM565.7mn last year. Given stabilising market coal prices, we reckon Genco’s earnings recovery is sustainable.

More Bullish on Demand Growth

On demand outlook, management raised its demand forecast to 3%-4% from 2.5%-3.0% previously in view of strong take-up by data centres (DC). This is perhaps, still a conservative target considering the 6.3% YoY demand growth seen in 1H24, which was driven by the commercial segment (primarily data centres) with new system peak demand of 20,066MW registered in July 2024. TENAGA shared that as of 1H24, nine DC supply projects have been signed this year entailing 1700MW maximum demand; seven projects with 1070MW maximum demand has been completed while another two projects with 630MW maximum demand is currently under construction. Importantly, some 21 projects with ~3200MW maximum demand (16% of current system peak demand) is currently in the supply application stage, which could significantly increase system peak demand in the short-to-medium term. Through Genco, TENAGA is a potential beneficiary of higher demand both from greater plant utilisation and potential new capacity to meet data centre power needs.

Repowering Plans for Paka and Kapar Power Plants

Management also shared TENAGA’s plans to repower the Paka power plant with a proposed Combined Cycle Gas Turbine (CCGT) capacity of 1400MW. The proposal is currently under negotiations with the regulators and if successful, TENAGA is targeting for commercial operation date (COD) by 2030. On top of this, TENAGA is also looking at the potential of repowering the Kapar power plant with new 2100MW CCGT capacity by 2031. The Kapar power plant currently comprises a block of 1486MW coal capacity and another 564MW conventional gas capacity, which are due for expiry in 2029. Nevertheless, the plan for Kapar repowering is still at an early stage since it is still serving its Power Purchase Agreement (PPA) currently. The former could provide incremental earnings catalyst for Genco considering that the PPA for Paka has long expired. In the near-term, TENAGA shared that the recently expired SJ Gelugor (310MW capacity) is expected to secure short-term extension until year-end.

RE Projects Remain on Track

TENAGA also shared that its Renewable Energy (RE) plans remain on track. The first 8MW unit (out of a total 651MW) of the Sungai Perak Hydro Life Extension Program is on track for COD in 2026. While overall capacity remains largely the same, the hydro scheme will see new engines installed, which is expected to improve plant efficiency given that the Sungai Perak Hydro plant is one of the oldest in the country. Meanwhile, the Nenggiri 300MW hydro project is expected to come on-stream by 2Q27. Nenggiri has achieved 33% project progress with a targeted 56% project progress by year-end.

On TENAGA’s flagship National Energy Transition Roadmap (NETR) projects, the hybrid hydro-floating solar PV (HHFS) entailing ~2900MWp is expected to be completed by 2040. For Phase 1 development (COD: 2025), the group has identified two sites namely Chenderoh (45MWp) and Temenggor (300MWp). TENAGA has identified the EPCC for the former and is in the process of shortlisting the EPCC for Temenggor. Meanwhile, the group’s 5x100MW centralised solar park project under NETR is targeted for COD in 2026. The group is in the midst of preparing lease agreements. We gather both the CSP and HHFS will likely utilise the recently launched Corporate Renewable Energy Supply Scheme (CRESS) mechanism for supply to offtakers. There are other, smaller capacity RE projects that are in progress, but overall, we estimate some 4.5GW RE capacity is expected to come on-stream over the medium to longerterm.

RP4 Assessment on Track

Management indicated that TENAGA’s Regulatory Period 4 (RP4) proposal is on track. The proposal has been submitted earlier with a series of negotiations with the regulators expected in September 2024 before regulatory approval is obtained within 4Q24. An announcement is expected in December 2024. So far, no details are forthcoming yet, but TENAGA had previously indicated of potentially doubling its capex from RM45bn to RM90bn for the period 2025 until 2030. Should this materialise, we expect an acceleration in TENAGA’s regulated asset base (RAB), which should expand its regulated earnings in tandem. Regulated earnings is estimated to account for circa 70%-80% of group bottomline and is a key catalyst for TENAGA.

Impact

No change to earnings forecasts

Valuation

Following the analyst briefing, we turn more bullish on TENAGA and upgrade the stock to Buy from Hold at a higher DCF-based TP of RM17.30 (from RM14.95/share previously) premised on higher terminal growth rate of 2.0% (from 1.8% previously), considering structurally improved growth prospects for the group. This is underpinned by: (i) Recovering Genco earnings given diminishing fuel margin loss (ii) Genco as a potential beneficiary of rising power demand on the back of rapid data centre growth in the country (iii) Expectations of a structural expansion in grid investments to accommodate the influx of RE capacity driven by NETR and higher power capacity requirement driven by data centre industry growth. At 6.1x FY25 EV/EBITDA, TENAGA is currently trading at a discount to historical mean of 7.2x.

Source: TA Research - 3 Sept 2024