Summary
TENAGA announced the key details for RP4, with base Capex at RM26.6bn (+29.2% from RP3), WACC unchanged at 7.3%, and base tariff at 45.62sen/kWh (+14.2% from RP3).
We are Positive on the RP4 parameters announced. While the parameters largely align with our expectations, the contingent Capex offers potential upside.
Separately, TENAGA announced that it has been shortlisted by the EC to develop a 500MW LSS PV Plant at Kuala Muda, Kedah under the LSS5 bidding cycle.
We have revised our FY25/FY26 earnings forecast by 5.9%/-1.8% respectively as we factor in the full earnings potential for RP4 in FY25. Following our earnings revision, we raise our TP to RM16.04 based on DCF valuation (WACC: 7.1%, g: 2.0%). Maintain BUY.
Regulatory Period 4 Details announced. Tenaga Nasional Berhad (TENAGA) has released the details for Regulatory Period 4 (RP4). The allowed Capex is set at RM42.8bn (averaging RM14.3bn annually). This comprises RM26.6bn of base Capex (averaging RM8.9bn annually) and RM16.3bn of contingent capex (averaging RM5.4bn annually). Allowed Opex is set at RM20.8bn (averaging RM6.9bn annually). The WACC remains unchanged from RP3 at 7.3%. Additionally, the base tariff for RP4 is set at 45.62sen/kWh (RP3: 39.95sen/kWh).
Base Capex and WACC Align with Expectations. We are Positive on the RP4 parameters announced. Although the parameters align with our expectations of an annual base Capex of RM9bn and a WACC maintained at 7.3%, the contingent Capex offers potential upside.
Contingent Capex Likely Not Yet Accounted for in the Allowed Return. Based on the latest guideline by the Energy Commission (EC), Contingent Projects are associated with Unpredictable Capex driven by unique investment needs. These projects depend on specific conditions occurring during the RP, which may not be certain at the outset. A Regulated Business Entity (RBE) may request adjustments to its annual revenue requirement if the triggering condition materialises, justifying the need for investment. Contingent Projects are classified under unpredictable Capex and are managed through an ex-ante mechanism, which integrates them into the Regulated Asset Base (RAB) and Annual Revenue Requirement upon approval. In summary, these projects are likely not yet accounted for in the allowed return or the base tariff announced for RP4.
Contingent Capex Could Offer Upside. While no specific details on contingent Capex have been disclosed, we believe they could include investments such as Battery Energy Storage Systems (BESS), contingent on the technology becoming more commercially viable. In a best-case scenario where all contingent Capex is fully utilised, we estimate a 10.2% increase in annual average allowed return or equivalent to an additional c.RM500m in returns annually compared to the base case, where only base Capex is incurred.
Differences Funded through KWIE. In the same announcement, TENAGA disclosed that the current electricity tariff schedule, which has been in place since 2014, will remain unchanged, with no adjustments to the tariff rate or structure until 30 Jun 2025. The new tariff schedule for RP4 is proposed to take effect on 1 Jul 2025. Any differences between 1 Jan to 30 Jun 2025 will be funded through the Kumpulan Wang Industri Elektrik (KWIE).
Secured 500MW LSS5 Project. Separately, TENAGA announced that it has received a Letter of Notification from the EC as a shortlisted bidder for the development of a 500MW Large Scale Solar (LSS) Photovoltaic Plant at Kuala Muda, Kedah. The project is likely part of Package 3 under the LSS5 initiative. LSS5 offers a total capacity of 2GW and is expected to achieve commercial operation by 2026. While the earnings contribution from this project is not expected to be significant for TENAGA, this marks a positive milestone as the Group accelerates its efforts towards decarbonising operations and enhancing its renewable energy portfolio.
Earnings Revision. We have revised our FY25/FY26 earnings forecast by 5.9%/-1.8% respectively as we factor in the full earnings potential for RP4 in FY25. Previously, we anticipated that FY25 earnings may not fully capture the potential growth from RP4 due to the delay in implementing the new base tariff, where any shortfall in allowed return was expected to be accounted for over the remainder of the RP4. TENAGA has clarified that these differences will be funded through the Kumpulan Wang Industri Elektrik (KWIE) in its latest announcement.
Valuation & Recommendation. Following our earnings revision, we raise our TP to RM16.04 based on DCF valuation (WACC: 7.1%, g: 2.0%). Maintain BUY. No ESG premium or discount has been applied, given the Group’s three-star ESG rating.
Risk. Rapid plunge in coal prices, unplanned shutdowns of power plants, weakening of Ringgit, policy risk.
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Currency | Buy Rates (RM) | Sell Rates (RM) |
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