TENAGA: Underlying Growth Prospects Intact Amidst Tax Headwinds, Buy Rating Affirmed

TA Securities has maintained its Buy recommendation, despite tweaking the target price lower to RM15.80 from RM17.30 previously. The adjustment follows earnings revisions due to higher effective tax rates. However, the investment bank remains positive on the long-term outlook, citing robust regulated capital expenditure (capex) driven by demand growth and significant energy transition projects.

Performance and Capex Momentum

The group’s regulated capex reached RM5.2 billion in 1HFY25, expanding its Regulated Asset Base (RAB) to RM71.4 billion. Management anticipates hitting RM12 billion in regulated capex for the full year, with contingent capex ranging between RM1 billion and RM2 billion. Approximately 55% of FY25 contingent capex is allocated to demand growth, while the remainder supports energy transition initiatives.

Key projects fueling this capex include a 500kV Bentong South-Lenggeng overhead line spanning 99km, a smart meter rollout targeting 360,000 units for the full year (72% complete as of July 2025), and distribution automation involving 4,026 substations (53% complete). Additionally, a pilot Battery Energy Storage System (BESS) at Santong is 37% complete, targeting a Commercial Operation Date (COD) by December 2026. Data centre connection projects also significantly contribute to the regulated capex spend, with total connected capacity reaching 6.7GW as of August 2025. Peak demand hit a new high of 21,049MW in May 2025, and 1HFY25 electricity demand volume grew 0.4% year-on-year, primarily anchored by a 6.5% growth in the commercial segment.

Tax Challenges and Earnings Revision

A significant near-term overhang stems from ongoing tax issues. The company is awaiting the Ministry of Finance’s (MoF) decision on its resubmission of a tax incentive application. The total P&L exposure to the Inland Revenue Board’s (IRB) additional tax assessment is estimated at RM10.7 billion (RM1.84/share), with the remaining cash flow exposure at RM4.5 billion (RM0.77/share) after prior payments. Management intends to make necessary payments but does not see the need for a provision given its resubmission and legal advice.

Following the expiry of Reinvestment Allowance in FY24, the effective tax rate is expected to rise to 28%-30% from a previous ~20%. This higher tax rate assumption has led to a 6%-13% revision downwards for FY25F-27F net profit forecasts, partially offset by robust regulated capex and associated returns.

Future Outlook and Recommendation

Despite the tax concerns and earnings revision, the long-term outlook remains solid. The finalization of the RP4 contingent capex recovery mechanism in 2HFY25 is expected to provide a boost to regulated returns. Furthermore, the group has submitted multiple bids for the Energy Commission’s gas capacity tender, which could serve as a potential catalyst for its generation arm. Management asserts that sufficient underlying operating cash flows (approximately RM20 billion per annum) will ensure the continued funding of capex plans, with FY25 regulated capex expected to be 50-55% debt-funded and non-regulated capex project financed up to 80:20 debt-to-equity.

TA Securities maintains its Buy call, emphasizing the company’s position as a key beneficiary of the energy transition, supported by a step-up in grid capex and data centre-driven demand growth. The current valuation of 5.4x FY26F EV/EBITDA trades at a discount to its historical mean, making it an attractive investment despite policy and regulatory framework risks.