• Keep BUY with MYR16.70 TP, 20% upside with c.4% FY25F yield. Tenaga Nasional’s strong set of results further reiterates our bullish stance on the stock. We see TNB as a proxy to Malaysia’s energy transition growth journey under the National Energy Transition Roadmap (NETR). It should also continue benefiting from the continuous upgrade in transmission and distribution assets, where the demand for energy can be anchored by the mushrooming data centre (DC) developments.

• At 56% of our and Street FY24 estimates, 1H24 core earnings of MYR2.2bn (+24% YoY) have exceeded expectations, due to a better-than-expected contribution from the domestic genco and higher-than-expected revenue. Note: Our numbers have imputed MFRS 16 changes (1H24: -MYR338m, 1H23: -MYR335m). 2Q24 core profit recovered strongly (+45% QoQ, +59% YoY) on a stronger domestic power generation arm as a result of improved operational numbers and lower negative fuel margins. This was partly offset by higher depreciation charges and tax expenses. 1H24 core earnings also improved 24% YoY on the abovementioned reasons.

• Outlook. Electricity demand rose 6.3% YoY in 2Q24, largely driven by stronger commercial (+10%) and domestic (+11.9%) segments. Demand hit a new peak of 20,066MW in July. TNB’s current renewable energy (RE) capacity remains largely unchanged QoQ, at 4.3GW (21% of total capacity). There is currently 6.2GW of RE in secured capacity – including those in the construction and development stages. Pending the outcome of Regulatory Period (RP) 4 – which is to be known by end-2024 – we may see some restructuring in tariffs to account for new initiatives such as energy exports and wheeling charges collection under the third-party access or TPA mechanism. We estimate average regulated capex to increase by 25-40% vs RP 3 levels, to MYR8.6-9.6bn pa with higher annual demand growth of 3-4% and an unchanged WACC of 7.3%. Based on our sensitivity analysis, we see regulatory net returns rising by 1.34% for every MYR1bn increase in average capex pa.

• We increase our FY24-26 earnings estimates by 5%, 1% and 3% after imputing higher revenue while our DCF-based TP remains at MYR16.70 (with a 6% ESG discount. Our TP implies 1.56x FY25 P/BV (+1SD from the 10-year mean). TNB’s foreign shareholdings improved to 15.3% as of July (Dec 2023: 12.5%), albeit still well below the peak of 28.7% that was recorded in 2016. Downside risks: Higher operating costs and greater-than-expected plant outages.

Source: RHB Research - 30 Aug 2024