TENAGA has revised upward again its guidance for electricity demand growth to 5.8%-6.3% in 2024 from 3.0%-4.0% previously, backed by a strong pipeline of data centre projects. While 3QFY24 core profit plunged 58% QoQ to RM633.8m due to higher non-fuel opex, these costs are likely non-recurring. Data centre-driven demand is expected to lift earnings. The RP4 is at an advanced stage and we expect WACC to remain at 7.3%. We maintain our forecasts, TP: RM17.00 and OUTPERFORM rating.

We came away from TENAGA's post-3QFY24 results briefing feeling positive on its prospects. The key takeaways are as follows:

1. 3QFY24 results were weaker sequentially owing to higher non- fuel opex such as general expenses (+20% QoQ or RM84.5m higher) and subsidiaries' general expenses (+15% QoQ or RM149.5m higher). To recap, it registered 3QFY24 core profit which plunged 58% QoQ to RM633.8m. It explained that there was higher cost of sales from both group and its subsidiaries to support higher revenue. This trend may not reoccur in the future.
2. Raised demand growth again. Its electricity sales of 14,175GWh (+7.6% YoY) in 9MFY24 which was higher than the country's GDP growth of 5.3% for the same period, is unheard of as demand growth has been below the GDP growth since the 2000s. TENAGA revised its 2024 demand growth upward again to 5.8%-6.3% from 3.0%-4.0% which was revised upward in September from 2.5%- 3.0% previously.
3. Regional business opportunities. Under the Lao PDR-Thailand- Malaysian-Singapore Power Integration Project (LTMS-PIP), TENAGA has signed an agreement with Singapore's Keppel Electric to supply up to 100MW of electricity. Since September, it has exported electricity of 7.5GWh to-date to Singapore. TENAGA expects to sign an agreement for 50MW with winning bidder in December under the Cross Border Electricity Sales Renewable Energy Scheme. TENAGA expects RM60m new revenue stream from this segment in FY25.
4. Expanding RE capacity. TENAGA targets to expand its RE portfolio from a generation mix of 23% currently to 42% in 2050 and to have zero coal power plant by 2050 from 45% generation mix currently (see Page 2). Under the schedule, 5.9GW of power plants, including two coal assets, will be retired from now till 2030, to be replaced with 10GW new green power assets, such as solar, floating solar, hydro, wind, hydrogen as well as battery storage (see Page 2).
5. Data centre growing. As of September, there are 31 data centre projects which required a total maximum demand of 4.7GW. Of which 17 projects are in the system (nine projects with 0.6GW completed prior to this year and eight projects with 1.1GW completed in the first nine months of this year), eight projects with 1.9GW are under construction while the balance of six projects with 1.1GW already signed Electricity Supply Agreement (ESA). Actual load utilisation was 248MW in September from 190MW in June.
6. Demand growth led GenCo's operational efficiency. GenCo reported 9% YoY decline in revenue to RM17.95b in 9MFY24 due to Manjung 4's forced outage (resumed operations on 5 Nov). However, its EBIT doubled to RM1.19b, thanks to demand growth-driven higher availability factor - thus it recorded lower capacity payment loss. The stable coal price this year resulted in a small negative fuel margin of RM92.0m, turning GenCo profitable with RM426.3m at PAT level as opposed to a loss after tax of RM327.9m after a massive negative fuel margin of 767.9m in 9MFY23.
7. Lower receivables by 16% YoY in 3QFY24, driven by lower ICPT and improved collections. The ICPT under-recovery declined 21% YoY to RM5.8b from RM7.3b in 3QFY23 as coal price has stabilised at USD121.4/MT in Sep 2024 as opposed to USD138.62/MT a year ago. Meanwhile, collection trend was strong with collection rate >100% since Mar 2022.
8. RP4 assessment is in advanced stage. TENAGA has a series of negotiations with the regulator in September and it is currently at the advanced stage, pending regulatory approval with decision announcement in December. Due to sensitivity, TENAGA is unable to share details but its tone is interpreted by us that at best it is able to maintain its current WACC of 7.3% as higher RAB value will generate earnings base. The RAB value has been revised upward to RM67.53b in 3QFY24 from RM66.60b previously.

Our view. We expect earnings to recover in 4QFY24 on the back of higher load utilisation for data centre which will drive operations efficiency while the higher opex reported in 3QFY24 may not reoccur. On the other hand, we are comfortable even if RP4 returns did not get a rise from 7.3% currently as a flat rate of return with a growing RAB value would still generate earnings growth. As such, we are of the view that RP4's rate of return is to maintain at 7.3%.

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 successfully resumed its operations on 5 Nov after it was on forced outage since Dec 2023 due to steam turbine high vibration. We have reflected the loss of RM400m capacity payment in our FY24F set.

Forecasts. Maintained. Our electricity sales assumption for FY24-FY25 is maintained at 3.5%.

Valuations. We maintain our DCF-derived TP of RM17.00 based on WACC of 6.7% and TG assumption of 2.0%. There is no adjustment to our TP based on our ESG 3-star rating (see Page 5).

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. Maintain 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 Dec 2024