SLVEST: Leading Utility Projects Strong Earnings on Strategic Initiatives and Capex Approvals
| Investment Bank | TA SECURITIES |
|---|---|
| TP (Target Price) | RM0.25 (+25.0%) |
| Last Traded | RM0.20 |
| Recommendation |
A major utility company is set to deliver robust earnings growth, driven by a series of strategic initiatives and a favorable regulatory environment. Analysts have significantly upgraded net profit forecasts, leading to a higher target price and a reiterated “BUY” recommendation for the national power provider.
Performance Highlights
The company’s recurring net profit forecasts have been substantially revised upwards, with an 11% increase for FY25, 21% for FY26, and 25% for FY27. This positive outlook stems from extensions of power purchase agreements for three gas plants and reduced net interest expenses. A long-standing tax dispute, involving a MYR10.6bn tax treatment, was resolved in 3Q25, removing a significant overhang on potential earnings. Despite a temporary negative Free Cash Flow (FCF) in 3Q25 due to one-off tax payments, the full financial year is expected to close with a positive FCF, underpinning the company’s commitment to sustained dividend payouts.
Strategic Growth Drivers
Key to this optimistic forecast are several strategic developments. The Government’s approval of a Reinvestment Allowance (RIA) for past qualifying capital expenditure (capex) of up to MYR10.6bn is expected to significantly lower the effective tax rate (ETR). Analysts estimate that every 2-percentage point reduction in ETR could boost earnings per share (EPS) and fair value by 3%.
Furthermore, the company anticipates substantial approvals for MYR16bn in contingency capex, potentially expanding the total Regulatory Period 4 (RP4) capex by 61% to MYR42bn. Securing two-thirds of this contingency capex could translate into an 8% upside for FY26F EPS. These capex projects are crucial for supporting new Corporate Renewable Energy Supply Scheme (CRESS), Large-Scale Solar 6 (LSS6), and Battery Energy Storage System (MyBeST) initiatives, which necessitate significant grid upgrades.
The utility provider has also secured Letters of Notification (LON) for the extension of three gas-fired power plants, adding 1.3GW of capacity with commercialization slated from mid-2026 until 2030, contributing directly to annual earnings. The potential to secure extensions for an additional 1.2GW and its strong position as a frontrunner in the Energy Commission’s Category 2 tender for 6-8GW of new gas-fired capacity by 2030 could further enhance its valuation by 11%.
Future Outlook and Demand
Looking ahead, the company is poised for stable regulated earnings under the RP4 framework. Electricity demand is projected to grow by an average of 4.7% annually until 2030, significantly driven by the expansion of data centers. Its commitment to sustainability is reflected in an improving ESG rating, with its renewable energy portfolio reaching 4.6GW and a further 8.8GW in the pipeline by 2030, expected to substantially reduce CO2 emissions.
Risks and Valuation
While the outlook is largely positive, key risks include the potential implementation of a carbon tax, which could impact EPS, though it is not expected to be punitive initially. Delays in contingency capex approvals or a higher-than-expected ETR also pose potential challenges. Nevertheless, the company’s current valuation is seen as attractive, being a prime beneficiary of the National Energy Transition Roadmap.
