TENAGA: Earnings Fall Short on Higher Tax Rate, ‘BUY’ Recommendation Maintained

Analysts at a leading investment bank maintained their “BUY” recommendation for the utility provider, despite its third-quarter 2025 (3Q25) core profits of MYR830.8 million falling below expectations. The results, representing an 8% quarter-on-quarter decline but a 76% year-on-year surge, accounted for only 18% of both the investment bank’s and consensus full-year estimates.

Performance Review

The earnings miss was primarily attributed to a significantly higher effective tax rate (ETR) of 28.9%, a substantial increase from 13% in 3Q24, following the cessation of reinvestment allowances. Additionally, higher depreciation charges and MYR232.8 million impairment losses contributed to the quarter-on-quarter decline. Despite a 2.6% year-on-year increase in electricity demand during 3Q25, the higher ETR offset these gains.

Operational Highlights and Challenges

Electricity demand saw a robust 3.9% year-on-year increase, driven mainly by stronger commercial (+9.8% YoY) and domestic (+5.5% YoY) segments. Growth in the commercial sector was largely fuelled by demand from data centers, retail, and business services. This growth was partially tempered by a weaker industrial segment, which recorded a 3.6% year-on-year decline in electricity consumption, impacting sectors like iron, steel, and utility electricity. The utility provider’s current renewable energy (RE) capacity stands at 4.6GW, representing 22% of its total capacity.

The investment bank highlighted that while base capital expenditure (capex) would have factored in average demand growth of 4-5%, contingent capex could reflect an additional 3% demand growth. The company is confident that 60-70% of the proposed contingent capex will be spent within Regulatory Period 4 (RP4). The utilisation of this capex is contingent upon factors such as the Malaysian Government’s rollout of solar programs, particularly Large Scale Solar 6 (LSS6), and the continued demand from data centers.

Future Outlook and Valuation

Following the disappointing earnings, the investment bank has trimmed its earnings estimates for FY25F-27F by 14.4%, 14.6%, and 14.1% respectively, primarily due to the higher ETR assumptions. Consequently, the DCF-based target price (TP) has been revised downward to MYR14.80 from the previous MYR15.50. Despite this revision, the new TP still implies a 12% upside from the last traded price of MYR13.20 (as per the report’s details).

The investment bank continues to favor the stock, citing that the bulk of its earnings are safeguarded under incentive-based regulation and that recent share price softness, reflecting concerns over the IRB tax dispute, appears largely priced in.

Key drivers for the stock include stronger earnings from non-regulated assets and high dividend payout ratios. However, potential downside risks encompass higher operating costs and a greater-than-expected number of plant outages, alongside aggressive regulatory reform and impairment on international assets.