TENAGA: Utility Sector Earnings Fall Short Amid Muted Demand, Outperform Rating Maintained

Public Investment Bank reported that Tenaga Nasional Berhad (TNB) recorded a 2QFY25 core net profit of RM881.9 million, a decline of 17.1% quarter-on-quarter and 31.9% year-on-year. This performance was primarily attributed to elevated fuel and non-fuel operating costs, despite stronger revenue from higher regulatory adjustments. Consequently, the first-half FY25 (1HFY25) core earnings of RM1,946.1 million fell below both Public Investment Bank’s and consensus full-year estimates, representing only 37.8% and 41.5% of projections, respectively.

Performance Review

The shortfall was largely driven by subdued electricity demand growth, which increased by a mere 0.4% year-on-year in 1HFY25, significantly missing the projected full-year range of 3.5%-4.5%. The industrial segment experienced a 3.6% contraction, though this was partly offset by robust 6.5% growth in the commercial sector. Despite the softer demand, TNB’s revenue exhibited resilience under the Regulatory Period 4 (RP4) framework, which facilitates recovery through regulated adjustments and supports the company’s substantial capital expenditure commitments for grid and distribution network upgrades.

Revenue Stability and Regulatory Adjustments

Excluding the Imbalance Cost Pass-Through (ICPT), TNB reported a 17.4% increase in revenue for 1HFY25, primarily due to a significant positive regulatory adjustment of RM3,594.5 million. This mechanism was crucial in offsetting slower-than-expected electricity demand growth, ensuring adequate revenue to support the planned increase in regulated capital expenditure. This structure provides stability for TNB’s critical investments despite demand volatility.

Tax Exposure Concerns

TNB faces a significant potential tax exposure of RM10.0 billion, with a net cash outflow of RM3.8 billion already accounted for payments related to previous assessment years. This exposure arises from the Inland Revenue Board’s (IRB) disallowance of Reinvestment Allowance (RIA) claims, which TNB is currently contesting through judicial reviews. The matter is pending review by the Ministry of Finance (MOF), and while TNB has not made any provision based on legal advice, this situation introduces uncertainty regarding the effective tax rate for the remaining quarters of FY25.

Future Outlook and Recommendation

Public Investment Bank has revised its FY25-FY27 earnings forecasts downward by an average of 15.7% to reflect the softer demand assumptions. Nevertheless, the firm reiterated its Outperform call with a DCF-derived target price of RM16.00.