Date: September 23, 2024
Broker Name: CGS International Securities
Overview of Tenaga Nasional’s Role in Malaysia’s Energy Transition
Tenaga Nasional is highlighted as a critical enabler and a central beneficiary of the National Energy Transition Roadmap (NETR). The NETR introduces a structural growth element to the utility sector, traditionally seen as defensive. Tenaga’s extensive involvement in energy transition and grid upgrades places the company in a position to benefit from Malaysia’s renewable energy (RE) initiatives.
Key Contributions to Energy Transition
Tenaga is expected to play a major role in the energy transition through extensive infrastructure upgrades. The company has estimated that about RM35 billion will be needed in infrastructure-related investments for energy transition (ET) from 2025 to 2030. These upgrades are crucial for strengthening the grid, integrating intermittent renewable energy sources, and ensuring reliable power supply, which aligns with the environmental, social, and governance (ESG) goals of the country.
Impact of the Corporate Renewable Energy Supply Scheme (CRESS)
The recently released guidelines for the Corporate Renewable Energy Supply Scheme (CRESS), which aims to allow third-party access (TPA) to the national grid, further emphasizes Tenaga’s importance. The guidelines specify that renewable energy (RE) developers will need to meet certain battery energy storage (BESS) requirements to qualify for firm output under the CRESS scheme. As part of this initiative, Tenaga’s grid upgrades are essential to accommodate the growing demand for RE capacity.
Financial Performance and Market Position
Tenaga’s financial metrics are strong, reflecting its solid market position. As of September 2024, its market capitalization stands at US$20.24 billion. The company’s stock price is RM14.64, with a target price of RM19.10. Key valuation metrics for 2024 include a Price-to-Earnings (P/E) ratio of 23.0x and an estimated dividend yield of 2.6%. Looking forward, the P/E ratio is expected to drop to 18.1x in 2025, with an increase in dividend yield to 3.3%.
Strategic Importance of Data Centre Theme
Apart from its role in energy transition, Tenaga is also viewed as an indirect play on the growing data centre theme in Malaysia. Data centres, which are becoming increasingly important as part of the country’s digital infrastructure, will require a stable and sustainable electricity supply, further underscoring Tenaga’s pivotal role in supporting both traditional and green energy demands.
Growth Potential and Market Sentiment
While Tenaga’s stock has performed well over the past year, market analysts believe there is further upside potential. The market has yet to fully account for the recurring regulated returns from the company’s energy transition-related grid upgrades. The company’s efforts in maintaining and upgrading the national grid are expected to drive its long-term growth and improve returns.
Risks and Challenges
Despite the positive outlook, Tenaga is not without risks. Key downside risks include any derailment in the execution of the NETR or unfavorable regulatory changes. These could potentially slow down the energy transition process and impact Tenaga’s projected returns from its infrastructure investments.
In summary, Tenaga Nasional is positioned to benefit significantly from Malaysia’s energy transition efforts, backed by its extensive role in grid upgrades and alignment with both the government’s renewable energy goals and the growing demand for data centre energy solutions.
