Earnings expansion possibility for TNB

PETALING JAYA: Tenaga Nasional Bhd (TNB) is seen as the key beneficiary from the National Energy Transition Roadmap (NETR) as it will gain incremental revenue from wheeling charges of cross-border electricity exports.

The grid upgrade for energy transition will be under a different scheme from the current regulated incentive-based regulation (IBR) scheme, according to TA Research.

There will be a single market aggregator to regulate the portion of renewable energy allowed to be exported and to implement multi-tier pricing to domestic and foreign firms.

“The factors would provide exciting earnings growth opportunities to TNB,” said the research house, which expects the returns to be higher than the IBR scheme considering the more lucrative price for renewable energy in Singapore.

“We are positive on the long-term outlook for TNB due to the improving cash flow from easing imbalance cost pass-through (ICPT) receivables, and exciting earnings growth opportunities from the NETR roadmap,” said TA Research.

On July 27, Economy Minister Rafizi Ramli launched the NETR, which comprises 10 catalytic projects worth RM25bil.

It said after factoring in the first quarter of financial year 2023 (1Q23) results and carrying out housekeeping to its model, it lowered its earnings forecasts for FY23, FY24 and FY25 by 11%, 15.2% and 15.8%, respectively.

It also lowered the discount rate for TNB from 7.5% to 7.2% and upgraded the stocks to a “buy’’ with a higher target price of RM11.80 a share based on discounted cash flow valuation.

It said the average coal and natural gas prices in 2023 are down 39.1% and 61%, respectively, compared with 2022.

Following the softening and stabilisation of fuel costs, TNB’s ICPT receivables are expected to continuously decline in the coming quarters.

The group’s ICPT receivables as at 1Q23 stands at RM13.8bil (down 18.3% quarter-on-quarter from RM16.9bil in 4Q22).

TNB’s ICPT cost from the government amounting to RM10.4bil for the first half of FY23 (1H23) has been fully recovered on July 14. The government has agreed to allocate RM5.2bil (RM4.7bil for TNB) for ICPT costs in conjunction with the electricity tariff adjustment in Peninsular Malaysia for 2H23. The group has increased borrowings since 2Q22 to pay upfront for the elevated fuel costs.

It said TNB’s finance costs increased by RM239.8mil or 9.8% year-on-year in FY22, contributed by rising interest rate environment and increased borrowings.

It expects the developments to ease TNB’s cash flow situation and contribute to better earnings as the group gradually reduces its gearing.