TENAGA: Utility Sector Earnings Poised for Strong Growth on Key Catalysts

An investment bank research report indicates a significantly improved earnings outlook for a major utility firm, driven by strategic initiatives and a favorable regulatory environment. Analysts at RHB have notably uplifted their net profit forecasts for FY25-27F by 11%, 21%, and 25% respectively, underscoring a strong growth trajectory. The firm’s target price has been raised to MYR15.60, representing a 15% upside from its last traded price of MYR13.56, while maintaining a “BUY” recommendation.

Performance Review and Outlook

The optimistic revision in earnings stems from several key catalysts. Primarily, approvals for Reinvestment Allowance (RIA) are expected to substantially reduce the effective tax rate (ETR). The government’s decision to allow the utility firm to recognise RIA for past qualifying capital expenditure (capex) up to MYR10.6 billion is a significant positive. This tax efficiency is projected to improve Earnings Per Share (EPS) and fair value by 3% for every 2 percentage point reduction in ETR, with a final decision anticipated this year.

Further upside is foreseen from contingency capex approvals. The research highlights potential MYR16 billion in additional contingency capex, which could inflate total Regulatory Period 4 (RP4) capex by 61% to MYR42 billion. This is estimated to boost FY26F EPS by 8%. These approvals are crucial for supporting projects under the Corporate Renewable Energy Supply Scheme (CRESS), Large-Scale Solar 6 (LSS6), and MyBeST programs, which necessitate extensive grid upgrades.

Strategic Growth Initiatives

The utility firm has also secured Letters of Notification (LON) for the extension of three gas-fired power plants, collectively adding 1.3GW to its capacity. The report suggests strong prospects for securing additional capacity, as the company is a frontrunner in the Energy Commission’s (EC) Category 2 tender to develop new gas-fired plants with a generation capacity of 6-8GW by 2030. A successful bid for a 2,800MW gas plant alone could lead to an 11% accretion to the target price. These extensions, alongside lower interest expenses, were key factors in the upward adjustment of net profit projections.

The firm is positioned as a prime beneficiary of Malaysia’s rising electricity demand, particularly from data centers, and the National Energy Transition Roadmap (NETR). This robust demand and strategic positioning justify its premium valuation, with the target price pegged to 19 times FY26 P/E, representing a +1 standard deviation from its three-year mean.

Identified Risks

Despite the positive outlook, the report identifies several downside risks. These include the potential implementation of a carbon tax, which could impact FY26-27 EPS by an estimated 8% if a MYR10 per tonne tax on Scope 1 emissions is introduced. Delays in contingency capex approvals and a higher-than-expected effective tax rate also remain key concerns for future earnings.