Tenaga Nasional Berhad (TNB) is set for a significant boost in capital expenditure for its Transmission and Distribution (T&D) infrastructure, driven by a surge in power demand surpassing historical trends. The company's latest performance underscores the need for an increase in T&D investments under Regulatory Period 4 (RP4) to address the growing electricity requirements. CGS International Stock Broking House have reiterated an ADD recommendation for TNB, with a revised Sum-of-Parts (SOP) based target price of RM19.10.
Power demand in Malaysia has notably accelerated, with quarterly growth rates reaching between 3.2% and 9.6% year-on-year from 2Q23 to 2Q24. This marks a sharp increase from the historical growth rate of 1.2% over the previous five years. This robust growth is propelled by higher consumption in the commercial and residential sectors. The existing electricity supply agreements, including those with data centres, suggest an ongoing annual growth rate of 3.5% to 5% over the next several years. In light of these trends, the budgeted average annual T&D capex of RM7.5 billion under RP3 (2022-2024), aimed at supporting a 1.8% annual demand growth, now appears inadequate. Consequently, there is a strong case for increased T&D capex under RP4 (2025-2027), alongside an estimated RM35 billion investment required for energy transition.
GenCo's financial performance has also shown marked improvement. After six consecutive quarters of losses, the company reported a profit after tax (PAT) of RM399 million in 2Q24. This turnaround is attributed to operational enhancements and cost efficiencies. Analysts have adjusted their profit forecasts for 2025 and 2026 upwards by 3% to 9%, reflecting this improved performance. The target price for TNB has been raised to RM19.10, driven by an increase in long-term growth expectations from 1.5% to 2% due to the optimistic power demand outlook.
Despite a 47% rise in TNB's share price year-to-date, outperforming the KLCI by 29%, the stock remains undervalued. TNB's shares are currently trading at an adjusted 2025 EV/EBITDA of 7.3x, compared to the regional power sector average of 9.1x to 13.2x. This discount is deemed excessive given TNB's strong earnings profile, with over 70% of its income derived from its regulated T&D business and the positive impact of the National Energy Transition Roadmap (NETR). Foreign shareholding in TNB has increased slightly but remains below previous highs, indicating room for further investment.
