Post management update, we remain upbeat on Tenaga’s outlook for 2023. Maintain our BUY recommendation on Tenaga with unchanged DCFE-derived TP of RM11.65. Management has guided for an attractive dividend 28-30 sen for 2HFY22 and potentially higher dividend in FY23 as cash flow continues to improve under recently approved ICPT RM16.2bn. GenCo is expected to post sustainable earnings in coming years, en-route for listing with 3-5 years’ time. Foreign shareholdings will continue to improve as Tenaga shows progress in its ESG initiatives and reports consistent earnings.

4QFY22 – Good dividend. Management has guided the earnings for 4QFY22 to be seasonally lower QoQ due to accelerating opex as well as lower contributions from own hydropower generation. We expect core earnings for 4QFY22 to sustain above the RM1bn level, resulting FY22 to achieve RM5.0-5.2bn. Management is confident of concluding at higher end of its dividend payout policy of 30-60% on adjusted net profit for FY22. Back of envelop calculations indicate an attractive 28-30 sen/share for 2HFY22 (vs. 20 sen/share in 1HFY22 and 18 sen/share in 2HFY21).

ICPT to stay. The latest approval of ICPT RM16.2bn for 1HFY23 reaffirms the new government’s commitment towards the ICPT mechanism. Tenaga will be able to recover RM10.8bn through government subsidies and RM5.4bn through higher tariff surcharge of 3.7-20.0 sen/kWh in 1HFY23. Management will continue to provide updates on cash recovery on monthly basis. As such, we expect Tenaga’s balance sheet to improve in 1HFY23 given the stability of global energy prices and higher ICPT cash collections. Given the improving cash flow, we do not discount potentially higher dividend payout in 2023.

GenCo to flourish. The restructured independent GenCo unit has continued to show improvements in earnings contributions (PAT RM1.1bn for 9MFY22) while making progress on its ESG initiatives. Management guided the potential listing of GenCo in 3-5 years’ time when the unit reports earnings consistency of RM1.5bn annually. The unit has also received LOIs to develop 1,400MW Paka power and 2,100MW Kapar power for new environmentally friendly technology involving gas power generation with hydrogen for cleaner energy production. Despite the potentially higher costing, the projects will be protected under PPA structure with a higher IRR investment returns (additional 2-3%) due to the higher risk and new technology nature. The collaboration with Widad group is strictly based on a commercial basis and diversifying capital justification, while encouraging more players into the power generation industry. Eventually, management has targeted to more than double GenCo’s revenue and fourfold EBIT contribution by 2050 as the unit expands its domestic new energy generation capacity as well as spreading its presence into regional markets.

Improving foreign shareholding. Latest Dec-22 number indicates continued improving foreign shareholding to 13.11%, highest since Dec-20 (see Figure #6). Management attributed the improvement to on-going efforts in promoting the group’s newly initiated ESG pathway - Tenaga Net Zero 2050 as well as government’s commitment towards ICPT mechanism.

Forecast. Unchanged.

Maintain BUY, TP: RM11.65. Post management update, we remain upbeat on Tenaga’s outlook. Maintain BUY recommendation on Tenaga with unchanged DCFE derived TP of RM11.65. Earnings for Tenaga is expected to sustain into 2023 (2022 partially affected by one-off Prosperity Tax). Cash flow is expected to improve in 2023 given the reversal of timing mismatch of ICPT.

Source: Hong Leong Investment Bank Research - 17 Jan 2023