KUALA LUMPUR (July 9): Analysts are upbeat about Tenaga Nasional Bhd’s (TNB)(KL:TENAGA) renewable energy (RE) venture in the United Kingdom (UK), with RHB Investment Bank (RHB IB) maintaining a “buy” rating, and Kenanga, a “market perform” call on the counter.
RHB IB kept its target price (TP) of RM16.10 on TNB, translating into a 13% upside and a 4% FY2025 yield, following an organised technical visit at the group’s UK operating unit Vantage RE Ltd.
Meanwhile, Kenanga Research maintained its forecasted TP of RM14.50.
“Post site visit, we believe Vantage RE will remain one of TNB’s major RE key growth drivers internationally,” said RHB IB in a note on Tuesday.
Vantage RE, which TNB had made investments in, in 2021, currently manages a portfolio of 94 sites with an 806-Megawatt (MW) RE-generation capacity (19% of TNB’s RE portfolio).
Of the 94 sites, two were solar farms (102MW) which were under construction (overall 3%-4% of the RE-generation market in the UK). Further aims by the UK branch to expand its RE portfolio up to 2.5-Gigawatt (GW) in the next five years were also highlighted by Kenanga.
Additionally, according to RHB IB, Vantage RE’s topline has demonstrated strong growth, from £34 million in FY2021 to £139 million in FY2023.
Vantage RE’s earnings before interest, taxes, depreciation and amortisation (Ebitda) margin was in the range of 69%-75% in FY2021-2023.
RHB IB also added that the relatively stronger Ebitda margin of 75% recorded in FY2022 was largely driven by the Russia-Ukraine-led spike in energy prices.
RHB IB reported that in its observation, the majority of Vantage RE’s current RE assets have long-term support schemes in place.
“We are guided that these subsidies are important and could contribute to more than 50% of Vantage RE’s revenue in the medium term.
“As such, these RE assets typically fetch high single-digit returns, with a slight premium for wind, assuming a useful life of (circa) c.30 years,” RHB IB stated.
Meanwhile, Kenanga said: “Although Vantage RE is relatively small at only 5% of TNB’s total installed capacity, it propels TNB to the RE space in an advanced economy, as well as state-of-the-art wind-farming technology”.
Kenanga had also concluded that TNB’s new avenue of growth was driven by electricity demand from data centre investment of more than 5,000MW by 2035 (20% of total generating capacity in Malaysia).
“With stabilising coal prices, it is likely that TNB will be spared huge negative fuel margins.
“It’s Manjung 4 plant has been on forced outage since December 2023, due to high steam turbine vibration and repair works [being] expected to be completed by the end of the year,” the research house said.
Kenanga has thus reflected a capacity payment loss of RM400 million in its FY2024 forecast for TNB, with risks to its recommendation including ballooning under-recovery of fuel costs, straining TNB cash flow, a global recession, and non-compliance of ESG standards set by various stakeholders.