Company Spotlight: News Fueling Financial Insights

TNB’s Renewable Energy Push and Tax Risks Weigh on Shares

Affin Hwang Research maintains a bullish stance on Tenaga Nasional Bhd (TNB), citing strong renewable energy (RE) prospects through its Australian unit, Spark Renewables. The research house reaffirms a "buy" rating with a 12-month target price of RM16.20, driven by TNB’s alignment with Malaysia’s energy transition and rising electricity demand from data centers. However, a Federal Court ruling on reinvestment allowances poses a significant downside risk, potentially exposing TNB to RM6.5 billion in additional taxes (RM1.12 per share). Despite this, TNB expects lower cash outflows as it contests the claim. Operational strengths, including Spark’s RE pipeline, offset some concerns, but regulatory changes and cost pressures remain key risks.

Sentiment Analysis

✅ Positive Factors

• Renewable Energy Growth: Spark Renewables’ RE pipeline supports TNB’s long-term sustainability goals.
• Energy Transition Demand: TNB benefits from Malaysia’s shift to cleaner energy and data center-driven electricity demand.
• Undervalued Stock: Share price decline (-RM10-11 billion market cap) may have overcorrected for tax risks.

⚠️ Concerns/Risks

• Tax Liability: RM6.5 billion potential tax burden could reduce target price by 7%.
• Regulatory Uncertainty: Unfavourable policy changes or operational disruptions could hurt earnings.

Rating: ⭐⭐⭐⭐

Short-Term Reaction

📈 Factors Supporting Upside

• Market may price in Spark’s RE potential and undervaluation.
• Resolution of tax dispute could trigger a rebound.

📉 Potential Downside Risks

• Prolonged tax uncertainty or higher-than-expected liabilities.
• Regulatory headwinds or cost overruns.

Long-Term Outlook

🚀 Bull Case Factors

• Spark’s RE assets drive earnings and align with global decarbonization trends.
• Data center expansion sustains electricity demand growth.

⚠️ Bear Case Factors

• Tax disputes escalate, straining cash flows.
• Operational inefficiencies or policy shifts hinder profitability.

Investor Insights

Recommendations:

• Growth Investors: Hold for RE exposure but monitor tax developments.
• Value Investors: Consider entry if tax risks are priced in.
• Conservative Investors: Await clarity on liabilities before committing.

Business at a Glance

Tenaga Nasional Bhd, or TNB, is the largest electric utility company in Malaysia. The company is involved in the generation, transmission, distribution, and sale of electricity. TNB segments its operations into a generation division, a transmission division, and a distribution division. The generation division encompasses the company?s portfolio of thermal and hydroelectric power plants located throughout Malaysia. Through its subsidiaries, TNB also engages in other energy-related operations, such as the manufacturing of transformers and the providing of consulting services. The company primarily generates revenue through the sale of electricity in West Malaysia. Its customers are mainly commercial operations, domestic consumers, and large industrial entities.
Website: http://www.tnb.com.my

Unveiling Analysis: Opportunities and Risks Uncovered

Financial Performance Analysis

• Revenue Growth & Trends:

  • Revenue grew 3.41% YoY to MYR 65.83B in 2024 (vs. MYR 63.67B in 2023).

  • Quarterly volatility observed: Q1 2024 revenue dipped 2% QoQ, likely due to seasonal demand shifts or regulatory adjustments in electricity tariffs.

  • Table: Revenue Trend (2022–2024)

    Year	Revenue (MYR B)	YoY Growth
    2022	62.50	1.3%
    2023	63.67	1.9%
    2024	65.83	3.4%

• Profitability:

  • Net income surged 69.6% YoY to MYR 5.04B (2024), driven by cost efficiencies and lower financing costs.
  • Margins improved:
    • Gross margin: 25.1% (2024) vs. 23.8% (2023).
    • Net margin: 7.7% (2024) vs. 5.1% (2023).
  • Operating margin stability (~15%) suggests controlled operational costs despite inflationary pressures.

• Cash Flow Quality:

  • Free cash flow (FCF) yield: 14.4% (2024), up from 9.8% in 2023, reflecting stronger cash generation.
  • P/OCF of 3.39x (current) vs. 5.91x (2022) indicates improved cash flow efficiency.
  • Debt/EBITDA at 4.46x (2024) signals manageable leverage but warrants monitoring.

• Key Financial Ratios:

  • Valuation: P/E of 15.9x (slightly below 5-yr avg. of 17.2x), EV/EBITDA of 7.48x (vs. industry avg. ~8.5x).
  • Liquidity: Quick ratio of 1.07 (healthy short-term coverage).
  • Efficiency: ROE of 8.34% (below regional peers avg. ~12%), indicating moderate capital utilization.

Market Position

• Market Share & Rank:

  • Monopoly in Malaysia’s electricity transmission/distribution, controlling ~90% of the grid.
  • Regional expansion (UK, Australia) contributes ~8% to revenue but faces stiff competition.

• Revenue Streams:

  • Core segments:
    • Transmission (60% of revenue, +4% YoY).
    • Generation (25%, +2% YoY).
    • International (8%, flat growth).
  • Ancillary services (7%) grew at 5% YoY, lagging core operations.

• Industry Trends:

  • Energy transition: Malaysia’s 2025 renewable energy target (31% mix) pressures Tenaga to diversify beyond fossil fuels.
  • Regulated tariffs: Government-imposed caps limit pricing power but ensure stable demand.

• Competitive Advantages:

  • Regulatory moat: Exclusive grid access under the Energy Commission.
  • Scale: Lowest cost-per-MW in Southeast Asia due to hydro/thermal mix.

• Comparisons:

  • Vs. YTL Power (Malaysia): Tenaga has higher margins (7.7% net vs. YTL’s 5.2%) but lower ROE (8.3% vs. 11.5%).

Risk Assessment

• Macro & Market Risks:

  • FX volatility: 30% of debt is USD-denominated (MYR weakness raises financing costs).
  • Inflation: Rising coal prices (20% of input costs) could squeeze margins.

• Operational Risks:

  • Debt/Equity of 1.45x is above utility sector avg. (1.2x).
  • Quick ratio of 1.07 suggests adequate liquidity but no buffer for major shocks.

• Regulatory & Geopolitical Risks:

  • Potential tariff freezes or renewable subsidies diluting profitability.

• ESG Risks:

  • Carbon intensity: 45% of generation is coal-based (vs. global utility avg. 35%).

• Mitigation:

  • Hedging: Fuel cost pass-through clauses in tariffs.
  • Renewables: Accelerating solar/hydro investments (MYR 2B capex planned for 2025).

Competitive Landscape

• Competitors & Substitutes:

  • Key peers: YTL Power, Sarawak Energy, Malakoff.

  • Table: Ratio Comparison (2024)

    Company	P/E	Debt/Equity	ROE
    Tenaga	15.9	1.45	8.3%
    YTL Power	18.2	1.20	11.5%
    Sarawak Energy	12.1	0.95	9.8%

• Strengths & Weaknesses:

  • Strength: Unmatched grid infrastructure.
  • Weakness: Lower ROE vs. peers due to high leverage.

• Disruptive Threats:

  • Solar independents: Rooftop solar adoption could reduce grid dependence.

• Strategic Differentiation:

  • Digital grid investments: MYR 500M in smart metering to curb losses.

Valuation Assessment

• Intrinsic Valuation:

  • DCF assumptions: WACC 8.5%, terminal growth 3%. NAV: MYR 14.50/share (5% upside).
  • Peer multiples: EV/EBITDA of 7.48x vs. sector median 8.5x suggests undervaluation.

• Valuation Ratios:

  • P/B of 1.30x (below 5-yr avg. 1.45x) aligns with sector.
  • Dividend yield of 3.7% is attractive vs. Malaysia’s 10-yr bond yield (3.2%).

• Investment Outlook:

  • Catalysts: Renewable energy subsidies, tariff adjustments.
  • Risks: Debt refinancing costs, coal price spikes.

• Target Price: MYR 15.00 (9% upside) based on blended DCF/multiples.

• Recommendation:

  • Buy: Undervalued vs. peers, stable dividends.
  • Hold: For income investors (3.7% yield).
  • Sell: If debt/equity exceeds 1.6x.

• Rating: ⭐⭐⭐⭐ (4/5 – Balanced risk-reward with growth potential).

Summary: Tenaga offers stable dividends and moderate growth, but leverage and energy transition risks require monitoring. Valuation is attractive relative to peers, with upside from renewable investments.

Market Snapshots: Trends, Signals, and Risks Revealed