TENAGA's 9MFY24 results matched expectation. A weaker sequential result in 3QFY24 due to higher non-fuel opex but electricity sales (+1%) hit another record high. Demand for the commercial segment rose 2% QoQ and 10% YTD. This reinforces our belief that Malaysia's data centre industry will drive demand growth, enhancing operational efficiency at GenCo and thus boosting non-regulated earnings, alongside regulated returns. We maintain our forecasts, TP of RM17.00 and OUTPERFORM recommendation.

9MFY24 results inline. At 73%/79% of house/street's full-year forecasts, TENAGA's 9MFY24 core profit of RM3.20b met our expectations. As expected, it did not declare any dividend in 3QFY24 as it usually pays half-yearly dividend.

Weaker sequential results on higher non-fuel opex but sales were comparable. 3QFY24 core profit declined 58% QoQ to RM633.8m largely due to a higher non-fuel opex. Nonetheless, demand sales hit another record high which inched up slightly by 1% led by industrial (+4%) and commercial (+2%) but offset by lower domestic segment by 5%. Overall opex, including fuel costs, dipped marginally by 1% as fuel price declined while applicable coal price (ACP) fell 6% to RM499.6/MT.

Negative fuel margin declined further to RM22.2m from RM44.0m in 2QFY24.

Demand sales led yearly results higher. YTD, 9MFY24 core profit rose 3% YoY to RM3.2b on the back of 7% hike in revenue to RM42.4b, thanks to higher electricity sales by 8% that led to higher operating efficiency at GenCo. Commercial (+10%) led the demand growth due to new demand from data centres. Meanwhile, total fuel costs which was passed through, declined 12% on ACP contraction of 17% to RM521.8/MT as coal prices declined. YTD negative fuel margin fell substantially to RM92.0m from a massive RM767.9m in 9MFY23 when it went through a volatile coal price.

Outlook. TENAGA has found a new avenue of growth fuelled by electricity demand from data centre investment of >5,000MW by 2035, equivalent to 20% of total generating capacity in Malaysia. In the near term, a total of 700MW data centre is slated to come onstream by this year. Meanwhile, with stabilising coal prices, it is likely to be spared huge negative fuel margins. Its Manjung 4 Plant has successfully resumed its operations on 5 Nov after it was on forced outage since Dec 2023 due to steam turbine high vibration. We have reflected the loss of RM400m capacity payment in our FY24F set.

Forecasts. Maintained. Our electricity sales assumption for FY24-FY35 is maintained at 3.5%.

Valuations. We maintain our DCF-derived TP of RM17.00 based on WACC of 6.7% and TG assumption of 2.0%. There is no adjustment to our TP based on our ESG 3-star rating (see Page 5).

Investment case. We continue to like TENAGA for: (i) its dominance in power generation, transmission and distribution in Malaysia, (ii) its defensive earnings backed a resilient domestic economy and assets that are largely regulated, (iii) its new avenue of sustainable earnings growth fuelled by electricity demand from data centres and transmission & distribution (T&D) investment to cater for developing data centres, and (iv) its heavyweight index-linked stock status. Maintain OUTPERFORM as TENAGA is the long-term beneficiary of the influx of FDI to build data centres in the country.

Risks to our recommendation include: (i) ballooning under-recovery of fuel costs, straining its cash flow, (ii) a global recession hurting demand for electricity, and (iii) non-compliance of ESG standards set by various stakeholders.

Source: Kenanga Research - 29 Nov 2024