Tenaga Nasional Berhad’s (TNB) 1QFY24 registered core net profit of RM918.8m is slightly weaker by 1.7% on a YoY basis due to losses in the generation segment (Genco) amid an outage in the Manjung 4 plant, higher losses than the negative fuel margin in 1QFY23. On a QoQ basis, TNB’s core net profit is 1.6x higher as its general expenses normalised in the absence of back-loaded charges in 4QFY23. Overall, the results are broadly meeting ours and consensus full year estimates at 23%. Due to the surge in electricity demand, actual units sold in 1QFY24 far exceeds forecasted base sales set in the Regulatory Period 3 (RP3) by 8%. On this note, we believe the upcoming RP4 would include a step-up forecast base sales to reflect the current demand and its prospects throughout the cycle. As such, we increase our FY25 earnings forecast by 9.9% to reflect the step-up forecast base sales and lower FY26 forecast by 6.5% as we assume lower annual sales growth set by the regulator. We maintain our Neutral call with higher TP of RM13.00 (from RM11.50) after we reflect the changes and rollover our DCF valuation to FY25.

• Incurred RM140.8m loss due to Manjung 4, which has been offline sinceDecember 2023 due to severe fractures in the intermediate pressure steamturbine. Barring unforeseen circumstances, management guided the plantwould be able to resume operation in October 2024. As for 1QYF24, theGenco has incurred capacity payment loss of RM140.8m mainly from theplant, which is slightly higher than earlier guidance of RM40m per month.We expect Genco to continue being a challenge for TNB in FY24.

• Electricity demand increased by 9.6% YoY to 31,899 GWh in 1QFY24,mainly bolstered by domestic (+16.8%) and commercial (+11.2%) segments. This far exceeds forecasted base sales set in RP3 (29,546 GWh) by 8.0%. Despite the higher units sold, TNB is required to return the excess under Incentive Based Regulation (IBR) framework via both revenue cap and price cap mechanism, which was pre-set based on Return on Regulated Asset Based (RoRAB) and WACC. We reckon this non-equitable regime would pose a risk in maintaining the system and limiting grid enhancement to support the National Energy Transition Roadmap (NETR).

• RP4 to facilitate NETR long term direction, by focusing grid investment,which is part of its regulated business segment. Hence, we believe a stepup in new forecast base sale would be included in RP4 to address thefunding gap of required capital expenditure (CAPEX) of RM90bn for the nextsix years. On another note, the establishment of Energy Exchange Malaysia(ENEGEM) to facilitate green energy export could provide additionalrevenue stream for TNB to enhance the overall system upon successfulcommencement of the 100MW pilot programme.

Source: PublicInvest Research - 4 Jun 2024