• We like Tenaga Nasional Berhad (TENAGA) for its defensive earnings attribute which supports its expansion plan and dividend payment that yields circa 4% p.a.

• In near term, we expect it to deliver stronger earnings driven by exponential growth by its regulated asset base. In longer term, it set to capitalize on rising decarbonisation trend by investing heavily on green energy.

• We resume coverage on TENAGA with a BUY recommendation and TP of RM12.12. Key catalyst to the stock price includes (i) its commitment to energy transition, (ii) lower commodities price which will reduce working capital - bolstering prospect for higher dividend, and (iii) rising foreign shareholding.

Benefitting from Regional Interconnection

We favour TENAGA for its defensive earnings attribute owing to IBR framework that provides fair return to its regulated business. Its earnings are poised to grow as its regulated asset base (RAB) is expected to grow exponentially to RM71bn by 2024. This is driven by the need to invest in the “grid of the future” which will provide the infrastructure for regional interconnection as well as supporting energy transition initiatives between countries.

Expanding Generation Capacity amidst Energy Transition Drive

The global trend of decarbonisation would require larger amount of investment particularly for green energy. TENAGA is on the right track to leverage on this mega trend given its commitment to invest c.RM10-20bn p.a. for its energy transition initiatives. To-date, it has achieved a 50% progress of its RE target of 8.3GW capacity (including large hydro plants) by 2025.

Steady Earnings Growth Prospect

We expect its earnings to grow by 8.7% CAGR over 2023-25F to RM4.5bn led by an expansion in RAB. It will also benefit from higher electricity sales from industrial and commercial segment driven by greater FDI especially in industrial sector such as semiconductor and data centre.

Dividend Policy

TENAGA follows a dividend policy that ranges from 30% to 60% (excluding special dividends) of payout ratio, based on adjusted PATAMI. We project TENAGA to pay a 36.6sen dividend per share (DPS) in FY23F, implying yield of circa 4%. TENAGA distributes dividends twice a year.

Resume Coverage on TENAGA with a BUY; TP RM12.12

We resume our coverage on TENAGA with a BUY recommendation and TP of RM12.12 based on DCF methodology. Our TP implies 17x FY24F P/E.

Source: BIMB Securities Research - 28 Aug 2023