• Keep NEUTRAL and MYR9.00 TP, 7% upside. 9M22 core profit was within our expectations. West Malaysia electricity demand continued to recover in 3Q22 (+0.6% QoQ) on better commercial and industrial consumption masking lower domestic usage. There is also a continued rise in trade receivables; +16% QoQ to MYR22bn, of which MYR15.5bn is related to the imbalance cost pass-through (ICPT). If the Government keeps tariff rates unchanged in 1H23, a much higher fuel subsidy will be required.

• At 75% of our and Street FY22 estimates, Tenaga Nasional’s 9M22 core profit of MYR3.3bn (-2% YoY) was within our expectations. Note that our numbers have imputed MFRS 16’s movements (9M22: -MYR700m, 9M21: -MYR434m).

• 3Q22 core earnings improved by 19% to MYR1.3bn due to lower generation cost due to higher generation from hydro plants. West Malaysia electricity demand continued to recover in 3Q22 (+0.6% QoQ) on better commercial and industrial consumption masking lower domestic usage. Despite revenue rising 46% YoY on significantly higher ICPT recovery and electricity demand (+8%), 9M22 core earnings fell 2% YoY on higher tax expenses and MFRS 16 net movements (seen from higher finance costs and depreciation charges) masking stronger generation profit.

• Outlook. Electricity demand continued to grow in tandem with GDP in 9M22 (+8% YoY). Note that there is an increase in hydro generation mix (3Q22: 6.3%, 2Q22: 3.5%) with lower coal and gas generation mix at 36.5% and 35.8% in 3Q22. As such, generation cost was lower QoQ due to higher generation from hydro plants masking higher gas and coal prices. Meanwhile, operating cash flow improved by 1.8x in 3Q22, totalling MYR4bn (-67% YoY) in 9M22. There is also a continued rise in trade receivables; +16% QoQ to MYR22bn, of which MYR15.5bn is related to ICPT. Net gearing rose to 0.88x in 3Q22 from 0.84x in 2Q22. We were guided that MYR4.8bn out of MYR5.8bn fuel subsidy for 1H22 has been paid between Jun-Nov 2022. With fuel prices still high, we believe operating cash flow will remain under pressure. If the Government keeps tariff rates unchanged in 1H23, a much higher fuel subsidy will be required to close the gap. Current renewable energy (RE) capacity stands at 3.9GW (16% of total capacity), which is a slight increase from 2Q22.

• Maintain earnings estimates and TP, with a 4% ESG discount based on TNB’s ESG score of 2.8. Foreign shareholdings stood at 12.6% as of 3Q22 (2Q22: 12.1%). Downside risks: Higher operating costs and higher-than- expected plant outages.

Source: RHB Research - 24 Nov 2022