Investment Highlights

• We downgrade Tenaga Nasional (TNB) to HOLD from BUY as its share price has risen to close to our DCF-based fair value of RM14.55/share (WACC: 7%, terminal growth rate: 2%). Our fair value implies FY25F PE of 20.6x. We ascribe a neutral 3-star ESG rating to TNB.

• The impact of the third-party access (TPA) to the electricity supply on TNB is expected to be negligible. We believe that TNB would still be the choice of consumers due to its track record, experience and retail expertise.

• TNB may benefit by enjoying free-wheeling charges from the third-party’s usage of the grid network. Details on the TPA would be announced in September 2024. We believe that IPPs such as Malakoff Corporation (effective generating capacity of 4,992MW (ex-Prai)) and Edra Energy (effective generating capacity of 4,518MW in Malaysia) would be interested in TPA to the grid.

• As for the Energy Exchange, the single buyer would be operating the bidding mechanism, which is the platform for players to buy and sell green electricity. To recap, the Energy Exchange is expected to commence in September 2024. Single buyer is an independent entity under TNB.

• RP4 (Regulatory Period) guidelines will be announced in 1Q2025. Negotiations on RP4’s parameters are ongoing. Proposals will be submitted to the cabinet for approval in October.

• We reckon that reference prices for forex, coal and gas would be higher under RP4 as global prices have risen. This means that the ICPT under or over recovery of energy costs may be smaller in future, resulting in less volatility in TNB’s earnings. Recall that under RP3, the reference rates are US$79/tonne for coal and RM30/mmbtu for Tier 1 gas. In comparison, coal prices are hovering between US$135/tonne and US$145/tonne currently.

• In spite of the strong electricity demand growth of 9.6% in Peninsular Malaysia in 1QFY24, the increase for the full year is envisaged to be lower at 2.5% to 3% (vs. consensus GDP growth of 4.4%).

• After a strong 1QFY24, we reckon that electricity demand from the residential sector would soften as the weather becomes cooler. In any case, TNB can only recognise sales volume growth of 1.7% under RP3. Any surplus is returned to the Energy Industry Fund.

• TNB is currently trading at FY25F PE of 20.4x, higher than its 2-year average of 16x.

Source: AmInvest Research - 25 Jul 2024