CGS-CIMB Research views ESG risks for Tenaga as opportunities


KUALA LUMPUR: CGS-CIMB Equities Research views environmental, social and governance (ESG) risks for Tenaga Nasional Bhd as opportunities given the rapid growth in renewable energy (RE).

It said on Tuesday it expects TNB to benefit firstly from growing opportunities in RE as it expands its RE capacity domestically/internationally as a power generator.

Secondly, TNB will benefit from potential thermal plant bidding in the future due to growing electricity demand from digitalization.

Thirdly, the research house expects robust investment for electricity grids to cater to energy transition, which will grow its regulated asset base.

“Our target price of RM13.40 is based on 15 times FY22F price-to-earnings (TNB’s five-year historical P/E), which reflects the stock’s trading range during the incentive-based regulation (IBR) period.

CGS-CIMB Research from the recent ESG engagement session with TNB’s management, investors’ major ESG concerns for the group were carbon emissions, affordability of electricity access and the government’s growing emphasis on environmental sustainability.

TNB is currently working on its sustainability pathway, which is expected to be announced in 2H21, where more details such as its long-term commitments and key performance indicators (KPI) to monitor its sustainability performance annually could be disclosed.

“The majority of investors are constantly engaging with TNB to understand its efforts to address the ESG issue; only a few funds are shying away due to the group’s coal-related exposure.

“TNB is ranked average among its regional peers, and slightly slower than some of its leading peers, in terms of ESG progress, due to its business model, where it has to balance sustainability, affordability and energy security of the electricity supply,” it said.

The research house said TNB has set up a dedicated team and hired external consultants to specifically look at ESG and identify business opportunities (such as batteries) from energy transition.

It also said TNB is in a sweet spot to benefit from additional grid investments.

TNB is proposing RM25bil regulated capex for the upcoming regulatory period 3 (RP3, 2022-2024), which is higher than RP2’s approved capex of circa RM19bil, with more regulated capex to be allocated to facilitate energy transition (from RP2’s 12% of total capex to 19% for RP3).

With its natural monopoly position in Malaysia’s transmission and distribution, we believe TNB will likely benefit from this trend as these ongoing investments should be part of TNB’s regulated asset base, supporting its regulated earnings in future.

“We gather the existing grid infrastructure can dispatch up to 27% of RE. Currently, only 5% of its dispatched power comes from RE,” it said.

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