Review

• Tenaga Nasional Bhd (TENAGA) reported a 2QFY24 core net profit of RM1.36bn, which brought 1HFY24 core net profit to RM2.33bn. This is ahead of expectations making up 58% and 59% of our and consensus’ full year estimates, respectively.

• The group declared a first interim dividend of 25.0sen/share representing a 1HFY24 DPR of 62% against core EPS.

• QoQ: Excluding the impact of foreign exchange, as well as various impairments and writebacks amounting to RM85mn, 2QFY24 core net profit of RM1.36bn increased some 40% QoQ, mainly due to a significant recovery in the generation segment (Genco) which returned to the black with a PAT of RM399.4mn in 2QFY24 from an LAT of RM80.4mn in 1QFY24. We believe this is due to improvements in fuel margin dynamics, despite the drag from unscheduled outage at Manjung 4 Power Plant since Dec 2023. This was further supported by lower effective tax rate (2QFY24: 14.4% vs 1QFY24: 34.2%) during the period.

• YoY: 2QFY24 core net profit grew 60.4% YoY. Like the above reason, the strong earnings growth was driven mainly by a significant recovery in generation earnings at a PAT of RM399.4mn (2QFY23 LAT: RM116.7mn). This is coupled with lower finance cost (-11.6% YoY) in line with lower short-term borrowings given lower working capital requirement as fuel prices recede.

• Electricity demand sustained a robust 6.3% YoY growth to 33,121GWh in 2QFY24. This was driven mainly by the commercial and domestic segments which registered 8.8% and 7.7% YoY growth respectively. The former, we reckon, was driven largely by mushrooming data centres in the country. Industrial segment growth lagged however, up by just 2.6% YoY during the quarter.

Impact

• To reflect stronger than expected performance at Genco in 1HFY24, we raise FY24/25/26 net profit by 3.2%/3.0%/3.0%.

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 target of a 70% RE mix by 2050 from ~20% in 2020. This is further underpinned by upcoming implementation of the Corporate Renewable Energy Supply Scheme (CRESS), which ultimately aims to liberalise the RE market and 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.

• In addition, Malaysia recently 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 renewable energy to Singapore where the electricity price is much higher. TENAGA is a potential beneficiary as this will require expansion in interconnection with Singapore in the future.

Valuation

• Our DCF-based TP is raised to RM14.95/share (k: 7.0%, g: 1.8%) following the earnings upgrade in this report. However, our Hold call is maintained at this juncture. While we are positive on Tenaga’s medium to longer term prospects premised on NETR, we believe risk-reward is already balanced at current valuations, having seen TENAGA’s share price appreciate some 40% year-to-date.

Source: TA Research - 30 Aug 2024