KUALA LUMPUR: UOB Kay Hian Malaysia Research is upbeat on Tenaga Nasional Bhd’s (TNB) increasing emphasis on sustainable energy solutions and this sets the tone for the group’s ambitious renewable energy (RE) targets.
In its research note on Friday, it said TNB is focusing on sustainable energy solutions as it wants coal-related revenue to fall to 20% by 2030.
TNB’s RE targets include a 300mw hydro power plant, seeking LSS4 contracts and acquiring a 39% stake in the Sunseap Vietnam solar project.
“As TNB meets its ESG mandate, the business is expected to yield sustainable returns and pave the way for 5% dividend yield over 2021-22. RP3 discussions are underway, announcement towards 4Q21. Maintain BUY. Target price: RM13.70, ” it said.
UOB Kay Hian Research said broadly, TNB aims to have 8,300mw of RE generation capacity by 2025.
This is an increase of 1.5 times from 3,398mw of RE generation capacity as of December 2020. The bulk of the increase (c. 60%) in the RE portfolio is expected to come from international brownfield and greenfield projects.
Closer to home, TNB guides that: a) it is in negotiation with the government to reach financial close for a 300mw hydro power plant in Peninsular Malaysia, and b) it recently won a 50mw large scale solar project (LSS4).
“Our calculation for the recently-awarded LSS4 power plant suggests that the project IRR is lower than historical LSS2 and LSS3’s returns. Based on an average tariff of 17.7-19.7 sen/kwh, the project IRR for LSS4 is 6%-7% vs historical project IRR of 9%-11%, ” it said.
UOB Kay Hian Research believes the 6%-7% leveraged return is still within TNB’s investment threshold.
It highlighted three main points which were: a) low cost of borrowing; b) similar return garnered by conventional coal and gas-fired power plants; and c) importantly, helps achieve TNB’s ESG journey.
TNB aims to ensure that coal-related revenue does not exceed 25% of group revenue. Besides, there will be no new coal-fired power plant investments.
By 2030, TNB expects coal-related revenue to drop to less than 20% of group revenue.
“RE ambition is supported by the core regulated business. While TNB forges ahead with its RE ambition, the core regulated business (accounting for 94% of TNB’s net profit in 2020) is set to support the intermittency of RE generation.
“As TNB enters RP3 discussions, a larger portion of the regulated capex will be allocated to its energy transition (from 12% in RP2 to 19% in RP3). We expect total capex in RP3 to be higher than RP2 as it incorporates energy transition elements and the SMART grid rollout, ” it said.