• Keep BUY and MYR16.70 TP, 14% upside and c.4% FY25F yield. Post site visit, we have better clarity over the potential of the 2.5GW Hybrid Hydro- Floating Solar Photovoltaic (HHFS) flagship project under the National Energy Transition Roadmap (NETR) and see continuous stable returns from hydropower plants following the implementation of Hydro Life Extension Programme (HLEP).

• Technical visit to Chenderoh hydropower plant. Last week, TNB hosted a technical visit to its Chenderoh hydropower plant in Perak. TNB Genco has a total contracted capacity of 13.8GW, of which, 11.2GW is thermal capacity, followed by 2.5GW of hydropower. These hydropower plants are split into three hydro schemes, which are Cameron Highlands (634MW), Kenyir (665MW) and Sungai Perak (1.3GW). The Sungai Perak hydropower stations have a total of seven plants, while the Chenderoh hydropower plant is the second smallest plant with a capacity of 40.5MW. The plant has been running at full load capacity as it serves as a baseload supply to the grid.

• HHFS project update. The 2.5GW HHFS flagship project under the NETR will be constructed in phases between 2026 and 2040 with a potential to create emission avoidance of 3.1m tCo2e per year, which is equivalent to c.8% of total TNB’s Scope 1 and 2 emissions in FY23. The Chenderoh hydropower station, selected as Phase 1 of the HHFS project, has a potential to generate up to 70MW of floating AC solar power. The project is already at the advanced development stage pending several relevant regulatory approvals and finalisation of the business model. Construction is estimated to start in 1Q25 for 15-20months. TNB is aiming to close the project with an IRR of a high single digit. Note that earnings impact from Phase 1 of HHFS is expected to immaterial to TNB.

• HLEP to extend hydropower earnings. Approved in 2022, the HLEP involves the refurbishment of six hydropower plants in Sungai Perak with cumulated capacity of 649MW. TNB previously guided for total cost of investment at an estimated MYR5.8bn with an expected MYR200m annual EBIT returns. All the power purchase agreements (PPA) have been signed with much higher tariffs, ranging from MYR0.45-MYR0.71/kWh. With that, the project IRR could reach double digit based on a contract tenure of 40 years.

• We maintain our earnings estimates and TP at MY16.70 (with a 6% ESG discount). Our TP also implies 1.56x FY25F P/BV (+1SD from the 10-year mean). TNB should also continue benefiting from the continuous upgrade in transmission and distribution assets, where energy demand can be anchored by the mushrooming data centre developments. Downside risks: Higher operating costs and greater-than-expected plant outages.

Source: RHB Research - 22 Oct 2024