• Keep BUY, new MYR16.70 TP from MYR16.10, 20% upside with c.4% FY25F yield. We continue to like Tenaga Nasional, as it is 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 the demand for energy can be anchored by the mushrooming data centre (DC) developments.

• The DC fiesta. The growth of electricity consumption in West Malaysia is expected to surpass its 10-year average of 2.4%, largely led by the continuous expansion of DCs. We expect DC energy consumption alone to chart a CAGR of 1.6-2.6% between 2023-2035 if 3-5GW of DCs are fully operational by 2035. The Government has projected an energy reserve margin of 28-36% over 2024-2030. To accommodate such strong demand, we understand that there is an on-going cumulated capacity of 1GW 1+1 year short-term power purchase agreements (PPA) to be awarded in the near term. We do not discount the possibility of PPA extensions on expiring gas plants and believe experienced gas-based independent power producers (IPPs) such as TNB will potentially benefit from additional gas capacity expansion in the long run, as this fuel source replaces coal.

• Regulatory Period (RP) 4 expectations. Pending the RP4 outcome (to be known by end-2024) we may see some restructuring in terms of tariffs to account for new initiatives such as energy exports and wheeling charges collection under the third-party access or TPA mechanism. We estimate average regulated capex to increase by 25-40% vs RP2 levels, to MYR8.6- 9.6bn pa with higher annual demand growth of 3-4% and an unchanged WACC of 7.3%. Based on our sensitivity analysis, we see regulatory net returns rising by 1.34% for every MYR1bn increase in average capex pa.

• We lift FY25 and FY26 earnings estimates by 4% and 5% after increasing our capex assumptions to MYR13.8bn and MYR14bn. As such, our DCF- based TP rises to MY16.70 (with a 6% ESG discount imputed). TNB is trading at 16.7x FY25 P/E (above +2SD from the 10-year mean of 12x). The re-rating should continue, due to: i) Its transmission and distribution (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 number of data centres to spur energy demand to alleviate tariff hike pressure. Our TP implies 1.56x FY25 P/BV (+1SD from the 10-year mean). TNB’s foreign shareholdings improved to 14.8% as of June (Dec 2023: 12.5%), albeit still well below the peak of 28.7% that was recorded in 2016. Downside risks: Higher operating costs and greater-than-expected plant outages.

Source: RHB Research - 20 Aug 2024