Review

• Tenaga Nasional Bhd (TENAGA) reported a 3QFY24 core net profit of RM569mn (-38% YoY), which brought 9MFY24 core net profit to RM2.92bn (+6% YoY). This is within expectations accounting for 70% and 72% of our and consensus’ full year estimates respectively.

• QoQ: Excluding sizeable unrealised forex gains, as well as various impairments and writebacks amounting to RM1.02bn, 3QFY24 core net profit of RM569mn declined -58% QoQ due to higher operating cost, in particular general expenses (+19% QoQ) and subsidiary costs (+15% QoQ). In addition, excluding the impact of EIs, effective tax rate was significantly higher sequentially at 28% (2QFY24: 15%). Meanwhile, Genco EBIT dropped -36% QoQ but remains in the black.

• YoY: 3QFY24 core net profit dropped -38% YoY largely due to similar reasons i.e., higher operating costs arising from a spike in general expenses (+19% YoY) and subsidiary costs (+89% YoY). On a positive note, Genco returned to profits against an LAT of -RM134mn in 3QFY23 due to significantly narrower negative fuel margins. Manjung 4 resumed operations since November 2024 following major unscheduled outage since late 2023, which could spell improvements in Genco earnings from 4QFY24 onwards.

• Electricity demand sustained a robust 6.1% YoY growth to 33,358GWh in 3QFY24. This was driven mainly by the commercial and domestic segments, which registered 8.8% and 6.6% YoY growth respectively. The former, we reckon, was driven largely by mushrooming data centres in the country. Industrial segment lagged the overall demand growth, up by 3.1% YoY during the quarter.

Impact

• No change to our earnings forecast.

Outlook

• TENAGA stands as a beneficiary of the National Energy Transition Roadmap (NETR) given grid upgrade requirements to accommodate a significant increase in renewable energy (RE) capacity, in line with NETR’s 70% RE mix target by 2050 from ~20% in 2020. This is further underpinned by implementation of grid Third Party Access which ultimately aims to liberalise the RE market and further drive the influx of RE capacity into the grid. An increase in grid capex translates into an expansion in TENAGA’s regulated asset base which ultimately drives growth of the group’s earnings. This is expected to be underpinned by the upcoming RP4 decision towards yearend or early next year.

• In addition, the rapid growth of data centres is expected to drive demand for new generation capacity. As one of the largest incumbents, we believe TENAGA stands to benefit from plant-ups of new gas power plants. Some 6.4GW of new CCGT capacity is expected to come on-stream by 2030, of which, 4GW are believed to be pending award.

• Malaysia has 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 RE to Singapore where green electricity commands a significant premium. TENAGA is a potential beneficiary as this will require expansion in interconnection with Singapore in the future.

Valuation

• Maintain Buy at unchanged DCF-based TP of RM17.30 (WACC: 7%, TG: 2%). We continue to like TENAGA for improving growth prospects underpinned by: (i) Recovering Genco earnings given receding 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) Expansion in grid investments to accommodate the influx of RE capacity driven by the NETR and higher power capacity requirement driven by data centre industry growth. At 5.9x FY25F EV/EBITDA, TENAGA is currently trading at a discount to historical mean of 7.2x.

Source: TA Research - 29 Nov 2024