TENAGA’s 1HFY24 results beat our forecasts with higher-than- expected revenue. Electricity sales hit yet another record high in 2QFY24, reinforcing our belief that while there is a >5000MW MW data centre target by 2035, the current acceleration phase of data centre build-out over the next 12 to 18 months means electricity demand growth will prove higher than initially envisaged. Pegging to 3.5% growth, our FY24-25F earnings are lifted by 2-4% and TP by 17% to RM17.00. Upgrade to OP.

1HFY24 results above. TENAGA’s 1HFY24 core profit of RM2.23b beat our expectations at 57% of our full-year forecasts but met market consensus at 52% of full-year estimate. The variance against our forecast came from stronger-than-expected electricity sales and lower- than-expected staff cost. It declared a higher 1st interim NDPS of 25.0 sen in 2QFY24 vs. the 18.0 sen paid in 2QFY23.

YoY, 1HFY24 core profit jumped 25% to RM2.23b on the back of 8% hike in revenue to RM28.01b. This was largely due to higher electricity sales of 9% led by commercial (+10%), domestic (+12%) and industrial (+3%) while its international RE unit, i.e. TNB International reported a 31% jump in revenue. Meanwhile, total fuel costs which was passed through, declined 16% as applicable coal price (ACP) contracted 24% to RM533.4/MT as coal prices stabilised.

QoQ, 2QFY24 core profit soared 44% to RM1.31b largely due to higher revenue. (+5%, primarily due to higher electricity sales growth of 4%) Generally, operating cost was higher by 9%, led mainly by higher fuel cost (+5%) and repair & maintenance (+16%), while fuel prices were lower as ACP dipped 1%; the higher total fuel costs were a function of higher generation as electricity demand increased.

2QFY24 core profit jumped 78% on a flattish top line driven by lower opex such as repair & maintenance (-21%), staff cost (-8%) and general expenses (-42%), which more than cushioned a negative fuel margin of RM25.8m (vs. a positive fuel margin of RM149.2m three months ago. Its total fuel cost dipped 2% as ACP eased 1%. Negative fuel margin was manageable at RM44.0m in 2QFY24 as opposed to RM25.8m in the preceding quarter.

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 been on forced outage since Dec 2023 due to steam turbine high vibration, and repair works are expected to be completed this year-end. We have reflected the loss of RM400m capacity payment in our FY24F set.

Forecasts. We upgraded our FY24-25F earnings by 2% and 4%, respectively, as we raised our electricity sales assumption for FY24- FY35 to 3.5% from 3.0% previously, anticipating strong demand from data centre. We also raised our NDPS proportionally based on unchanged payout of 50%.

Valuations. Post earnings revision, we raised our DCF-derived TP by 17% to RM17.00 (from RM14.50) based on unchanged WACC of 6.7% and lower TG assumption of 2.0% from 2.5%, expecting electricity demand growth to normalise as data centre investment reaches its peak. There is no adjustment to our TP based on our ESG 3-star rating (see Page 6).

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. As such, we upgrade our recommendation to 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 - 2 Sep 2024