Post management meeting, we remain positive on Tenaga’s outlook and the group’s commitment towards environmental sustainability. We expect continued earnings growth into FY22-24 under the new RP3 framework, promising a sustainable dividend yield. Despite the surge in global energy prices, Tenaga will remain neutral under ICPT mechanism. We maintain our BUY recommendation on Tenaga with unchanged DCFE-derived TP of RM13.60.

Result recap. Tenaga’s reported a decent FY21 core PATMI at RM5.0bn, a growth of +11.2% YoY, mainly attributed to a combination of: 1) higher electricity sales; 2) lower Tenaga sales discount and contribution for Covid-19; 3) higher ancillary income from goods and services; and 4) higher associate contributions.

RP3 detail. Under the recently approved RP3 2022-2024, TNB has secured a fair WACC return of 7.3% (unchanged vs RP2) with higher allowed capex of RM20.6b (vs. RM18.8bn under RP2) and relatively unchanged opex of RM18.0bn (vs. RM18.2bn under RP2). The estimated asset base would start with RM60.8bn and end with RM70.8bn (average RM65.8bn), indicating an average allowable RM4.8bn return p.a. (vs. RM3.9bn under RP2). The projected electricity demand growth is 1.7% p.a.

ICPT. While TNB recognised RM4.5bn ICPT in 2H21, Energy Commission has only approved RM1.7bn ICPT to be recovered in 1H22. Management clarified this was due to timing differences and assured that the remaining RM2.8bn wiould eventually be recovered in subsequent period (i.e. 2H22), which explained by its ballooned receivable to RM10.7bn. We do not discount potential higher dividend payout in FY22, following recoupment of ICPT.

Sustainability. TNB’s long term “Sustainability Pathway towards 2050”, is anchored into 2 main cores: 1) sustainability of current core businesses; and 2) building new business for growth. Top management are committed towards ESG, with ESG related targets/objectives have been integrated as part of management’s KPI. 30% of CEO’s KPI is ESG related.

Core business. Management’s main focus is to decarbonize existing core business. Firstly, management targets to improve the group’s operational efficiency with ongoing turnaround program. Along the way, coal capacity will be phased out and gradually replaced with gas capacity. New technologies are being studied to accelerate decarbonisation exercise, such as co-firing ammonia in coal power station, optimize utilization and produce green hydrogen.

New business growth. Management will focus on RE business expansion in domestic and international market through greenfield and brownfield acquisition as well as restructuring its international business asset (especially GMR). Management will also push more aggressively into solar rooftop segment through its retail GSPAX unit. Within EV segment, management foresees business opportunity in providing charging infrastructure nationwide. It has signed collaboration with prominent e-mobility players eg. DHL, SOCAR, Sime Darby, BMW. Management expects a market of 500k EV units and 18k charging points by 2030.

Forecast. Unchanged.

Maintain BUY, TP: RM13.60. We maintain BUY on Tenaga with unchanged DCFEderived TP: RM13.60, given stable cash-flow and dividend payout. Tenaga’s earnings are expected to remain stable in FY22. We are positive with Tenaga’s long term commitment into ESG growth path, while ensuring returns to shareholders.

Source: Hong Leong Investment Bank Research - 28 Feb 2022