TENAGA: Strategic Initiatives Bolster Financial Outlook, ‘Buy’ Rating Maintained

A recent investment bank research report highlights several strategic advancements poised to positively impact a leading utility company’s future earnings and valuation. The report maintains a “Buy” recommendation, citing key operational and regulatory tailwinds.

Regulatory Clarity and Tax Benefits

The company has successfully resolved a longstanding tax overhang following a Federal Court decision in July 2025. This involved restating prior year’s financial statements to correct tax treatment related to Reinvestment Allowance under Schedule 7A, thereby preventing a substantial RM10.6 billion reduction in FY24 retained earnings and avoiding a lumpy provision in the current financial year. Further bolstering its financial position, the Ministry of Finance has approved the company’s application for Investment Allowance under Schedule 7B for past qualifying capital expenditure. While the precise tax benefits are still being assessed, this approval is expected to lead to lower effective tax rates, potentially re-rating earnings projections and valuations.

Enhanced Capacity and Infrastructure Development

In a move to secure future generation capacity, the company has obtained Letters of Notification (LON) for the extension of three existing power plants: Gelugor (310MW), Putrajaya (249MW), and Unit I of Tuanku Jaafar (703MW), totaling an aggregate of 1.26GW. These extensions are anticipated to pave the way for Power Purchase Agreement (PPA) renewals, promising a medium-term uplift to Genco earnings from FY28F onwards. Additionally, the Energy Commission is expected to announce shortlisted bidders for Category 2 greenfield power development by the end of FY25.

The report also notes significant progress on contingent capital expenditure, with RM8.3 billion already spent in the first nine months of FY25. This includes investments in supply security, demand growth, and energy transition projects. A decision on the recovery mechanism for contingent capex is expected by year-end, which will allow for the recognition of incremental returns.

Growth in Data Centres and Regional Connectivity

The utility is actively expanding its data centre connection portfolio, with 3.8GW of facilities already connected, another 2.2GW under construction, and 1.1GW under electricity supply agreements, bringing the total connected capacity to 7.1GW. Load utilization for these facilities has shown a positive trend, increasing to 18.7% of connected DC capacity by September 2025, and further to 850MW by October 2025, indicating robust power consumption growth.

Furthermore, five potential projects related to the ASEAN Power Grid (APG) have been identified. These cross-border interconnections, including links with Vietnam, Singapore, Thailand, Sarawak, and Indonesia, aim to enhance regional wheeling capacity. Discussions are ongoing regarding whether these investments will fall under regulated capex or commercial terms.

Investment Outlook

Analysts maintain a “Buy” rating, viewing the company as a key beneficiary of the ongoing energy transition and increasing grid capex to accommodate higher renewable energy penetration. The company’s generation arm is also well-positioned to capitalize on demand growth from data centres and the continuous gas power generation capacity tenders by the Energy Commission. Key catalysts for future re-ratings include the finalization of Schedule 7B tax incentives, the recovery mechanism for contingent capex, and new generation capacity contract wins.