TENAGA: Interim Earnings Miss on Higher Tax, Strong Future Prospects Underpin ‘Buy’ Rating

Investment bank TA Securities noted that despite interim FY25 (IHFY25) results falling short of expectations, particularly in bottom-line performance, underlying prospects remain strong, leading to the maintenance of a “Buy” recommendation. The earnings miss was primarily attributed to a higher-than-expected effective tax rate following the expiry of reinvestment allowance.

Performance Review

The company’s IHFY25 core earnings registered an 18% year-on-year decline, largely due to the aforementioned tax rate issue. Additionally, lower earnings from its Genco segment resulted from the expiry of the SJ Gelugor plant in August 2024, a one-off claim by SPG in IHFY24, and forex translation losses. On a quarter-on-quarter basis, 2QFY25 core earnings declined by 21%, primarily driven by a 22% increase in general expenses for software and cyber-security system maintenance, coupled with an 11% rise in repair and maintenance costs during the quarter. Despite these bottom-line challenges, core EBITDA and PBT for IHFY25 were largely in line with full-year estimates, accounting for 49% and 51% respectively. An interim dividend of 25 sen per share, representing a 65% dividend payout ratio, was declared.

Strategic Investments and Demand Growth

Looking ahead, the Fourth Regulatory Period (RP4) from January 2025 to December 2027 outlines a base capital expenditure (capex) of RM26.6 billion. Actual regulated capex of RM5.2 billion in IHFY25 indicates an accelerated spend, which is a positive development for expanding the regulated asset base and ultimately enhancing returns. The company has also indicated potential utilization of 60-70% of RP4’s contingent capex, amounting to RM16.3 billion, further reinforcing its investment in infrastructure. Demand for electricity continues to grow robustly, with peak demand hitting a new high of 21,049MW in May 2025. This surge is attributed to increasing investments in domestic data centres and manufacturing facilities, signaling healthy industrial growth.

Future Outlook and Energy Transition

As a grid monopoly, the company is set to be a key beneficiary of the National Energy Transition Roadmap (NETR). Significant grid upgrades are essential to accommodate a substantial increase in renewable energy (RE) capacity, aligning with the NETR’s target of achieving a 70% RE mix by 2050, up from approximately 20% in 2020. This strategic direction is supported by RP4 implementation, which includes a 29.2% increase in base capex to RM26.6 billion, potentially rising to RM42.8 billion if contingent capex is triggered. The framework also ensures sustained regulated returns at 7.3%, with projects under RP4’s contingent capex already pre-approved by the Energy Commission. TA Securities has kept its projections unchanged, pending an upcoming analyst briefing.

TA Securities maintains its “Buy” recommendation.