TENAGA: Utility Company Reports Strong Q3 Earnings, Positive Outlook on Tax Resolution
| Investment Bank | TA SECURITIES |
|---|---|
| TP (Target Price) | RM0.25 (+25.0%) |
| Last Traded | RM0.20 |
| Recommendation |
A major utility provider has reported robust third-quarter earnings that surpassed internal expectations, largely attributed to significant cost efficiencies and growth in its transmission and distribution (T&D) division. While year-to-date core net profit saw a modest decline against consensus estimates, the company’s Q3 performance indicates a positive operational trajectory.
Performance Review
For the third quarter of fiscal year 2025 (3QFY25), the utility group achieved a core net profit of RM1.17 billion, marking a 13% year-over-year increase. This strong quarterly performance was driven by a 3% year-over-year reduction in operating costs, benefiting from the absence of exceptionally high expenses incurred in 3QFY24 related to power station demolition, rehabilitation, and dredging. Additionally, the T&D division saw growth, with its regulated asset base (RAB) expanding to RM73.4 billion. Despite the strong Q3, the nine-month FY25 (9MFY25) core net profit stood at RM3.1 billion, a 9% year-over-year decrease, which aligned with the investment bank’s internal forecasts but fell below wider street estimates. Electricity demand grew by 3.9% year-over-year in 3QFY25, primarily led by the commercial (+9.8%) and domestic (+5.5%) segments, though partially offset by a 3.6% contraction in industrial demand.
Future Outlook and Strategic Initiatives
The company’s outlook is bolstered by several strategic developments. Capital expenditure (capex) under the Regulatory Period 4 (RP4), spanning January 2025 to December 2027, appears to be progressing ahead of schedule, with actual regulated capex of RM8.35 billion for 9MFY25 indicating higher spend against an average quarterly target. The potential utilization of 60-70% of RP4 contingent capex, amounting to RM16.3 billion, is expected to further accelerate the expansion of its regulated asset base and enhance future returns.
A significant positive development is the recent approval from the Ministry of Finance (MoF) for an Investment Allowance related to qualifying capex. While specific details on the quantum of the tax benefit are pending, this preliminary indication is viewed as a favorable resolution to a longstanding tax issue. Analysts suggest that the company’s share price may have already factored in a worst-case scenario for the tax issue following a prior Federal Court ruling.
Furthermore, the utility provider is positioned to be a key beneficiary of the National Energy Transition Roadmap (NETR), with anticipated grid upgrade requirements supporting the growth of renewable energy capacity. The implementation of RP4 itself forecasts a substantial increase in base capex and the potential for even higher contingent capex, promising sustained regulated returns. The company’s generation arm (Genco) is also expected to benefit from the rapid growth of data centers, driving demand for new power generation capacity.
Analyst’s View
The investment bank reiterates a BUY recommendation, setting a target price of RM0.25, representing a potential upside of 25.0% from the last traded price of RM0.20. This rating is underpinned by the positive operational momentum, resolution of tax issues, and strategic growth drivers.
