Kenanga upgrades TNB after recent fuel cost weakness

by RUPINDER SINGH / pic TMR

THE recent weakness in coal and gas prices has confirmed lower Imbalance Cost Pass-Through (ICPT) receivables for Malaysia’s national utility company, Tenaga Nasional Bhd (TNB). This has significantly eased TNB’s financing burden, prompting Kenanga Investment Bank Bhd to upgrade its call to ‘Outperform’ from ‘Market Perform’.

In a note to investors on May 9, Kenanga maintains its forecasts and target price of RM10, but believes that there is value in TNB after the recent weakness in its share price.

The research house believes that fuel costs for both coal and gas have already peaked in the fourth quarter of 2022 (4Q22), with the Indonesian benchmark coal price falling 20% from its peak of US$330.97 (RM1,482) per tonne in October last year to US$265.26 per tonne currently.

Additionally, it noted that the latest Department of Statistics Malaysia (DoSM) data showed that the price of liquefied natural gas (LNG) fell 25% in March to RM46.35 /mmbtu from its peak of RM61.83/mmbtu in September 2022.

As fuel costs decline, Kenanga said TNB’s ICPT receivables are likely to decline accordingly.

During its recent analysts’ briefing, TNB guided for a lower ICPT of RM12 billion for the second half ending Dec 31, 2023 (2H23), from RM16.2 billion in 1H23.

As a result, Kenanga said ICPT receivables are likely to decline to RM12 billion by 2Q23 from RM16.9 billion in 4Q22.

It said that these receivables will be fully recovered by TNB through the ICPT surcharge or direct payments by the government. For instance, the RM16.2 billion ICPT in 1H23 will be recovered via (i) a 20 sen/kWh ICPT surcharge from non-domestic customers and (ii) a RM10.4 billion payment from the government.

Kenanga opined that TNB’s borrowings are also likely to trend lower as its ICPT receivables decline in the coming quarters.

TNB’s borrowings rose to RM63.88 billion in FY22 from RM51.73 billion in FY21 as ICPT receivables surged to RM16.9 billion from RM4.78 billion over the same period.

Assuming ICPT receivables will be RM4 billion lower for the entire year, Kenanga said this will result in interest cost savings of about RM180-RM200 million to TNB in FY23.

Kenanga mentioned that TNB remains an attractive investment opportunity due to its dominant position in power generation, transmission, and distribution in Malaysia, earnings defensiveness backed by a resilient domestic economy, and assets that are largely regulated. Additionally, it noted that TNB is a heavyweight index-linked stock.

To address concerns over its coal-fired power capacity, it said that TNB will completely phase out coal-fired plants by 2045 from 48% gen-mix currently.

The company will repower certain retired coal plants using highly efficient combined cycle gas turbines (CCGT) with cleaner fuel, ie gas and hydrogen-ready technology (green tech).

At the same time, it pointed out that TNB has an aggressive expansion plan for its renewable energy business with an installed capacity target of about 14GW by 2050 from 0.4GW currently.