This article first appeared in The Edge Malaysia Weekly on November 27, 2023 - December 3, 2023
EXCITEMENT about Malaysia’s energy transition has certainly spilled over to Tenaga Nasional Bhd, the sole party involved in electricity transmission and distribution. And that has investment analysts even more upbeat about the prospects of the utility stock, in addition to its improved balance sheet and rising electricity sales over the past year.
The blue chip has climbed more than 30% since its October 2022 low of RM7.67, compared with the 5.87% rise in the FBM KLCI during the same period.
At the closing price of RM10 last Friday, Tenaga’s shares are now hovering near a three-year high. The stock is currently the third-best analyst pick among the 30 constituents of the FBM KLCI, after Telekom Malaysia Bhd and IHH Healthcare Bhd.
At the start of 2023, the government raised tariffs and honoured its commitment to refund the electricity subsidy shouldered by the company during the Covid-19 pandemic, when tariffs were kept low despite record-high coal prices.
Those actions lifted as much as RM8 billion of cash-flow stress at Tenaga under the imbalance cost pass-through (ICPT) mechanism. From a peak of RM16.9 billion at end-2022, the group’s ICPT receivables had declined to RM8.9 billion at end-June.
Electricity sales volume increased 2.7% year on year in the first nine months of 2023 (9MFY2023), building on the rising demand in 2022, when the country’s power consumption hit a record 125,234GWh. Consensus adjusted earnings growth is projected at 8.2% a year, from RM4.07 billion in 2023 to RM4.77 billion in 2025, Bloomberg data shows.
Analysts have pointed to upside potential from incremental revenues from grid usage for renewable energy (RE), cross-border electricity and higher RE capacities. Nonetheless, there is a lot that needs to be done by Tenaga that will require high capital expenditure (capex) to enable it to capture those opportunities.
Stronger balance sheet, bigger capex too
In an interview with The Edge, Tenaga president and CEO Datuk Seri Baharin Din says the utility giant plans to invest RM90 billion over five years from 2025, or RM18 billion annually.
A portion will be used to fund the proposed grid-scale battery storage rollout. Huge investments may also be required to address the emissions of its power generation business (see “Exploring unconventional ways to net zero emissions”).
Tenaga invested a total capex of RM48.24 billion, or RM9.65 billion a year, from 2018 to 2022. Its capex seemed to be affected by its tight cash flow during the pandemic, coupled with the regulatory uncertainties at the time.
The utility giant’s allowable regulated asset base (RAB) was RM61.9 billion at end-June 2023, which rose marginally from RM61.3 billion at end-2022. Compared with its end-2024 allowable RAB of RM70.8 billion,there is quite a gap of RM8.95 billion.
Its short- and long-term borrowings stood at RM7 billion and RM54.22 billion respectively at end-September, against a cash balance of RM15.6 billion, which doubled from RM6.29 billion before the pandemic. Its net gearing ratio was at 0.76 times, up from 0.66 times before the pandemic.
For 9MFY2023, Tenaga’s net profit shrank 17.6% to RM2.19 billion, or 37.91 sen per share, from RM2.65 billion, or 46.29 sen per share, a year earlier despite a 3.85% growth in revenue to RM39.41 billion.
Its profit was partly hit by foreign exchange losses. It has assets in the UK, Turkiye, India and Australia as well as operations in Saudi Arabia, Kuwait, Pakistan and Cambodia.
Despite the challenging past few years, Tenaga has continued to pay generous dividends, with a payout ratio of 126% in FY2020, 62% in FY2021 and 76% in FY2022. Last year, it paid out RM2.65 billion and, from FY2018 to FY2022, it paid a total of RM19.26 billion.
Currently, analysts’ consensus dividend forecast is 47 to 48 sen per share for FY2024 to FY2026, in line with 46 sen for FY2022 and 40 sen for FY2021.
“In spite of the heavy capex of RM35 billion to upgrade the grid, we reckon that Tenaga would still be able to maintain its dividend payout of 30%-60% of normalised net profit in the future,” AmInvest Research said in a report dated Oct 17. “This is due to Tenaga’s healthy annual free cash flows of more than 50 sen per share,” it said.
Khazanah Nasional Bhd is the biggest shareholder of Tenaga, with a 22.56% stake. The utility giant is part of the sovereign wealth fund’s strategic portfolio. The other shareholders include the Employees Provident Fund (EPF) with 16.54% and Kumpulan Wang Persaraan (Diperbadankan) (KWAP) with 6.88%.
On a positive note, the government has proposed a Single Buyer to manage a proposed energy exchange to facilitate Malaysia’s RE exports. And to ensure the Single Buyer’s independence in managing the export market, it will be carved out of Tenaga by next year — a move that could benefit the utility giant financially.
“We are very supportive,” says Baharin when asked about the matter. “It’s just a question of how we manage the treatment of existing PPA (power purchase agreement) [liabilities].”
The Single Buyer’s role is to pool electricity from all the power producers to be distributed to the entire market. Currently, the Single Buyer is a ring-fenced subsidiary of Tenaga, and the PPA-related liabilities, which are estimated to be in the billions, are recognised on its balance sheet.
In 2020, the Dewan Rakyat was told by then minister of energy and natural resources Datuk Dr Shamsul Anuar Nasarah that the obligations of PPAs carried by Tenaga at the time amounted to RM60 billion to RM80 billion.
If the Single Buyer is carved out of Tenaga, liabilities resulting from any future PPAs will not be included on its balance sheet. That would give it the space to gear up for other purposes.
Surprises on business model unlikely
Meanwhile, “baby steps” announced by the government to further open up the electricity industry, such as the virtual PPA model under the corporate green power programme (CGPP), are not expected to affect Tenaga’s business model significantly in the absence of a grid third-party access (TPA) mechanism.
For the TPA to be introduced, Malaysia’s electricity tariffs will need to be fully restructured. This may be reflected in the next electricity industry regulatory period 2025-2027 (RP4), Minister of Natural Resources, Environment and Climate Change Nik Nazmi Nik Ahmad told The Edge in a recent interview.
In the case of the CGPP, RE power producers will sign agreements with other long-term offtakers directly instead of Tenaga. However, this will not remove the utility giant from the electricity supply chain, mainly because it operates the national grid.
The investing fraternity does not see Tenaga being immediately affected by the handing over of Sabah’s electricity industry to the state government by Putrajaya, as part of the strengthening of the Malaysia Agreement 1963.
While regulatory power has technically been transferred this year, the transfer of Tenaga’s 83%-owned Sabah Electricity Sdn Bhd (SESB) to the state government will take place only by 2030. As such, the entity, which contributed RM2.55 billion, or 5%, of the group’s core revenue in 2022, is expected to continue contributing to Tenaga’s books in the medium term.
The average target price for Tenaga shares is RM11.39, based on consensus forward price-earnings ratio of 14.4 times. There are 17 analysts recommending a “buy” on the stock, with three “hold” calls and a “sell”.
At its closing share price of RM10 on Nov 24, Tenaga’s dividend yield for FY2024 is projected at 4.66%, compared with the FBM KLCI’s forecast simple average of 3.91%.
Having said that, its earnings trend and forecast is still a long way from the good old days of 2014 to 2017, when its net profit averaged RM6.7 billion and topped out at RM7.37 billion in 2016. Part of that was due to higher allowed returns on its regulated assets under the Regulatory Period 1 (RP1), compared with RP2 and RP3 from 2018 to 2024.
At its last close of RM10, Tenaga’s share price is down 38% from its peak of RM16 (non-adjusted) in May 2018.
The next regulatory period (RP4) will be from 2025 to 2027, and Tenaga submitted its proposals this month.
An analyst who covers the company says, “What we look out for is clarity on its regulated business in RP4, as well as the pace of the capex, although we believe Tenaga won’t disregard its financial profile. As for new technologies [to decarbonise its power plants], we believe it will take time before more capex kicks in.”
He says that is because it needs to wait for the local carbon capture and storage (CCS) provided by Petroliam Nasional Bhd (Petronas) to be ready. Petronas’ first two CCS projects in Sarawak will kick off in 2025 and 2027. It has been evaluating sites off Peninsular Malaysia since mid-2022.
With a 7,000mw of RE target by 2030, the analyst sees it as inevitable for Tenaga to continue investing in RE assets overseas despite the renewed interest in Malaysia.
An analyst with a foreign investment bank is of the view that Tenaga’s prospects “remain tied to government policies”. “The risk for Tenaga is if it is forced to take lower returns [in RP4] and if its power generation production goes down,” he adds.
The market seems to have warmed up to the idea that the country’s energy transition will help Tenaga improve its environmental, social and governance (ESG) compliance and future prospects. To taste the sweet fruit of the energy transition, however, the utility giant may first have to plough back its profits and raise borrowings for the RM90 billion capex in the coming five years.
Save by subscribing to us for your print and/or digital copy.
P/S: The Edge is also available on Apple's App Store and Android's Google Play.