• Keep BUY, TP dips to MYR16.60 from MYR16.70 TP, 19% upside with c.4% FY25F yield. Tenaga Nasional’s 3Q24 results missed expectations due to its higher non-fuel opex. We see TNB as a proxy to Malaysia’s energy transition growth journey under the National Energy Transition Roadmap (NETR). It should also continue benefiting from the continuous upgrade in transmission and distribution assets, where the demand for energy can be anchored by mushrooming data centre (DC) developments.

• At just 65% and 66% our and Street FY24 estimates, 9M24 core earnings of MYR2.7bn (+3% YoY) missed expectations, due to higher-than-expected expenses. Note: Our numbers have imputed Malaysian Financial Reporting Standards (MRFS) 16 changes (9M24: -MYR500m, 9M23: -MYR529m). 3Q24 core profit plunged (-64% QoQ, -42% YoY) on higher non-fuel opex, lower other operating income and lower deferred tax credit. Cumulatively, 9M24 core earnings still improved by 3% YoY on a lower negative fuel margins impact masking higher operating expenses.

• Outlook. Electricity demand rose 6.1% YoY in 3Q24, largely driven by the stronger commercial (+8.8%) and domestic (+6.6%) segments. TNB’s current renewable energy (RE) capacity increased slightly QoQ, to 4.4GW (21% of total capacity). Pending the outcome of Regulatory Period (RP) 4 – which is to be known by end-2024 – we may see some restructuring in 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 RP 2 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 decrease our FY24-26 earnings estimates by 6%, 4% and 4% after imputing higher opex while our DCF-based TP is lowered to MYR16.60, with a 6% ESG discount included. Our TP also implies 1.55x FY25 P/BV (+1SD from the 10-year mean). TNB’s foreign shareholdings improved to 18.9% as of October (Jun 2024: 14.8%), 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 Securities Research - 29 Nov 2024