Tenaga Nasional’s RP4 Boost: 30% Capex Growth and Stable Returns for 2025-2027

Tenaga Nasional Berhad (TNB): Comprehensive Analysis and Insights

Broker: UOB Kay Hian

Report Date: Tuesday, 07 January 2025

Overview of Tenaga Nasional Berhad (TNB)

Tenaga Nasional Berhad (TNB), a key player in Malaysia’s utilities sector, specializes in supplying natural gas to industries across Peninsular Malaysia. With a market capitalization of RM83.8 billion (equivalent to US\$19.2 billion), TNB is a prominent player in the energy industry. The company has maintained a steady trajectory despite market fluctuations, with its stock trading at RM14.58 as of the report date, though the target price has been set at RM13.20, indicating a potential downside of 9.5%.

Regulatory Period 4 (RP4): A Game Changer for TNB

The Malaysian government recently approved the implementation of Regulatory Period 4 (RP4) under the Incentive-Based Regulation (IBR) framework, which will span from January 2025 to December 2027. This new regime brings significant updates:

Allowable CAPEX: A total of RM42.8 billion, which includes RM26.6 billion in base capital expenditure (CAPEX) and RM16.3 billion in contingent CAPEX. This marks a 30% increase in base CAPEX compared to RP3.
Rate of Return: The Weighted Average Cost of Capital (WACC) remains at 7.3%, consistent with RP3.
Base Tariff Increase: The base tariff is proposed to rise from 39.95 sen/kWh to 45.62 sen/kWh starting July 2025, a 14% increase. However, this adjustment might face government intervention to minimize public impact.
ICPT Mechanism: TNB will remain cashflow neutral to fuel price volatility as any increase in generation costs will be passed through the Imbalance Cost Pass-Through (ICPT) mechanism.

Key Financial Highlights

Despite challenges, TNB’s financial performance reflects resilience and growth prospects:

Net Turnover: RM66.3 billion projected for 2024, growing to RM69.5 billion by 2026.
EBITDA: Expected to rise from RM21.7 billion in 2024 to RM21.2 billion in 2026.
Net Profit: Adjusted net profit forecast is RM4.57 billion for 2026, showing consistent growth.
EPS (Earnings Per Share): From 76.6 sen in 2024 to 80.3 sen in 2026, with a PE ratio stabilizing at around 18x.
Dividend Yield: Gradual growth from 3.4% in 2024 to 3.7% in 2026.
Net Debt to Equity: Expected to decline steadily from 72% in 2023 to 48.8% by 2026, reflecting better financial health.

Stock Impact

The announcement of RP4 aligns with market expectations and is expected to boost TNB’s net profit by approximately 3% annually from 2025 to 2027. However, the contingent CAPEX for energy transition initiatives is still under deliberation and might roll over to RP5 if not utilized in RP4. The proposed base tariff increase, if approved, reflects higher assumptions for coal, LNG, and US dollar rates.

Valuation and Recommendation

UOB Kay Hian maintains a HOLD recommendation for TNB, with a discounted cash flow (DCF)-based target price of RM13.20. This valuation incorporates a discount rate of 8% and a growth rate of 1%. At this target price, TNB is projected to trade at 17x its 2025 forward earnings per share (EPS), which is +2 standard deviations above its five-year mean price-to-earnings ratio (PER).

Environmental, Social, and Governance (ESG) Initiatives

TNB continues to push forward its ESG agenda, with notable progress in environmental, social, and governance domains:

Environmental

Targeting 8,300 MW in renewable energy (RE) capacity by 2025, up from 3,398 MW in December 2020.
Commitment to reduce emission intensity by 2035 and achieve net-zero emissions by 2050.
Plans to phase out coal usage entirely by 2050.

Social

Donated RM4.36 million to those affected by COVID-19.
Provided medical supplies, including ventilators and personal protective equipment (PPE), to government hospitals.
Contributed RM1 million to light up security posts during the Movement Control Order (MCO) enforcement in 2020.

Governance

Strong commitment to transparency, supported by anti-bribery and whistle-blowing policies.

Conclusion

Tenaga Nasional Berhad stands to benefit from the newly implemented RP4 framework, with a focus on increased base CAPEX, a stable WACC, and a potential tariff hike. Although uncertainties remain regarding contingent CAPEX and government intervention on tariff adjustments, TNB’s proactive ESG efforts and financial stability continue to position it as a key player in Malaysia’s energy sector. Investors are advised to maintain a HOLD stance, given the current valuation and market dynamics.