Tenaga Nasional Berhad - Powering Ahead with Stability and Growth
Fri, 28-Mar-2025 07:27 am
by Ong Tze Hern • Apex Research

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TENAGA (5347)

Target Price (RM)

16.04

Recommendation

Buy

Summary

  • We left our recent engagement with TENAGA confident on its outlook, supported by the following key points:

    (i) Robust data centre demand, with several ESAs signed in 2025.

    (ii) Additional growth potential from electricity export to Singapore, alongside resilient domestic demand.

    (iii) Stable earnings under RP4, with potential upside from contingent Capex.

    (iv) Management’s confidence in sustaining dividend payout above 50%.

  • No change to earnings forecasts.

  • Reiterate BUY recommendation with an unchanged TP of RM16.04 based on DCF valuation (WACC: 7.1%, g: 2.0%), and appraised with a three-star ESG rating, implying a valuation of 22x FY25 EPS.

 

Data Centre Demand Holds, with Several ESAs Signed in 2025. Despite concerns over data centre growth following the AI diffusion framework and the rollout of DeepSeek, TENAGA has not observed any noticeable slowdown in data centre enquiries. At least 3 new electricity supply agreements (ESAs) have been signed YTD. In addition, more than 90% of newly established data centres are unrelated to AI, limiting exposure to the impact of advanced chip export bans. Most of these data centres are owned or operated by non-Chinese entities, with Chinese companies accounting for less than 10% of the overall demand.

 

Demand Upside from Export to Singapore. Beyond domestic demand, there is potential upside from electricity exports to Singapore, which plans to import 6GW of low-carbon electricity by 2035. Currently, Malaysia has a 1GW interconnection with Singapore under the regulated asset base (RAB), which does not generate additional profit even if demand increases. However, discussions are ongoing to finalise the commercial terms for a new interconnection that will fall outside the RAB. This is positive for TENAGA, as it removes the profit cap imposed by the regulatory framework. 

 

Earnings Stable under RP4, with Upside from Contingent Capex. Under the IBR framework, any shortfall in demand growth compared to projections can be recovered through tariff adjustments in the upcoming Regulatory Period (RP). The last time this mechanism was triggered was during Covid-19 lockdown in RP2 (2018-2020). Notably, only 5.9GW of demand from 38 projects with signed ESAs is included in the base Capex and base tariffs under RP4. The new ESAs signed since the beginning of the year are classified as contingent Capex, offering earnings upside. Should actual demand exceed the assumptions under contingent Capex, TENAGA can recover the additional Capex through the “Unexpected Capex” mechanism. A precedent for this was seen during RP3, when the mechanism was used to accommodate higher-than-expected demand for transmission and distribution infrastructure driven by data centres.

 

Contingent Capex Recovery May Involve Revenue-Cap Revisions. The recovery mechanism for contingent Capex remains under discussion. One viable option being considered is a revenue-cap adjustment, which would increase TENAGA’s allowed revenue without affecting end-user tariffs. With at least one project expected to meet the triggering condition for contingent Capex in 1QFY25, further clarity on the recovery framework may be provided during the upcoming 1QFY25 results briefing. Recap that management is confident in securing 60%-70% of the contingent Capex in RP4.

 

Confident in Maintaining Decent Dividend Payout. While coal price forecast was raised from USD79/MT in RP3 to USD97/MT in RP4, this is still significantly lower than USD115/MT average delivered coal price in 4QFY24 (Figure 1). This could result in high ICPT receivables if the ICPT surcharge is insufficient to cover actual fuel costs. Additionally, expected Capex is set to balloon to c.RM20bn in 2025 (2024: RM11.3bn), which may pressure TENAGA’s cash flow. Nonetheless, the Group is confident in its ability to fund both working capital and Capex, supported by a RM6bn government guarantee facility available until 2029 for working capital purposes, as well as drawing down borrowings to fund for the Capex. Overall, the group is confident in maintaining a dividend payout of above 50%, consistent with its track record over the past eight years. Notably, the FY24 dividend payout ratio was 59.6% of adjusted PATAMI, at the upper end of its 30%-60% dividend policy.

 

New BESS Projects to Mirror PPA Model. TENAGA’s Battery Energy Storage System (BESS) pilot project under the RAB in RP4 is currently in the tender stage, with an award expected next month. In contrast, new BESS projects initiated by the Ministry of Energy Transition and Water Transformation (Petra) will not fall under the RAB. These projects are expected to adopt a structure similar to the PPAs, where developers invest in the assets and recover their costs by selling electricity to the grid at a fixed tariff over a concession period. TENAGA has participated in the tender process for the new BESS projects.

 

Earnings Revision. No change to earnings forecasts.

 

Valuation and Recommendation. Reiterate BUY with unchanged TP of RM16.04 based on DCF valuation (WACC: 7.1%, g: 2.0%), implying a valuation of 22x FY25 EPS. No ESG premium or discount has been applied, given the Group’s three-star ESG rating. We remain positive on TENAGA’s outlook, driven by rising energy demand, ongoing energy transition under the NETR, which requires significant grid investment and modernisation, as well as potential growth from low-carbon electricity exports to Singapore.

 

Risk. Rapid plunge in coal prices, unplanned shutdowns of power plants, weakening of Ringgit, policy risk.

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