• Upgrade to BUY from Neutral, new MYR16.10 TP from MYR11.80, 23% upside with c.4% FY25F yield. We now turn bullish again on Tenaga Nasional. It should continue to undergo a further re-rating, being a proxy to Malaysia’s energy transition growth journey under the National Energy Transition Roadmap (NETR). TNB should also continue benefiting from the continuous upgrade in transmission and distribution assets, where energy demand can be anchored by the mushrooming data centre developments.

• At 23% of our and Street FY23 estimates, TNB’s 1Q24 core earnings of MYR906m (-6% YoY, +73% QoQ) are in line. Note: Our numbers have imputed MFRS 16 changes (1Q24: -MYR159m, 1Q23: -MYR181m). 1Q24 core profit surged 73% QoQ, on lower opex and a stronger domestic power generation arm as a result of positive fuel margins. This was partly offset by higher finance and tax expenses. 1Q24 core earnings dropped by 6% YoY, dragged by losses that rose by 4% YoY from the domestic power generation arm. This, in turn, resulted from the absence of capacity payments for the M4 plant, weaker JV & associate contributions, as well as higher tax expenses.

• Outlook. Electricity demand rose at a much faster 9.6% YoY, vs GDP growth of 4.2% in 1Q24, largely driven by stronger commercial (+11.2%) and domestic (+16.8%) segments. Demand hit a new peak of 20,028MW in April. The upcoming Third Party Access framework is not a threat, because TNB will still own the infrastructure and may have to incur capex to upgrade it. It will also charge independent power producers a fee for using its grid infrastructure. The impact of the TPA framework on TNB’s transmission and distribution (T&D) arm will also be rather neutral, assuming the utilisation of T&D assets will be compensated fairly with wheeling charges. TNB’s current renewable energy (RE) capacity remains largely unchanged QoQ, at 4.3GW (20% of total capacity). There is currently 6.2GW of RE in secured capacity – including those in construction and development stages. The outcome of Regulatory Period (RP) 4 (2025-2027) is likely to be known by end 2024.

• We maintain our earnings estimates but lift our TP to MY16.10 (with a 6% ESG discount) after rolling forward our valuation base year to FY25, removing the regulatory discount of 10% as well as raising the terminal growth rate to 2% from 1.5%. TNB is trading at 16.4x FY25 P/E (above +2SD from the 10-year mean of 12x). This should increase, due to: i) Its T&D investments to strengthen the T&D asset base; ii) its strong balance sheet to expand RE capacity and replace coal with gas assets; and iii) rising data centres to spur energy demand to alleviate tariff hike pressure. Our TP implies 1.5x FY25 P/BV (+1SD from the 10-year mean). Foreign shareholdings improved to 13.3% as of April (Dec 2023: 12.5%), albeit still well below the peak of 28.7% (recorded in 2016). Downside risks: Higher operating costs and greater-than-expected plant outages.

Source: RHB Research - 4 Jun 2024