2QFY25 CNP of RM830.1m (-22.4% QoQ, -47.2% YoY) brought 6MFY25 CNP to RM1.9bn (-25.3% YoY), missing expectations at 45% of our full-year forecast and 40% of consensus estimates. The shortfall stemmed mainly from higher-than-expected operating costs, which compressed margins.
The Group declared a first interim dividend of 25.0sen (2QFY24: 25.0sen).
CNP dropped 22.4% QoQ, weighed down by higher operating expenses across both generation and non-generation lines, as well as higher depreciation costs.
Following the precedent-setting Federal court ruling on 2 July, TENAGA disclosed that is has paid RM2.7bn in taxes for YA 2018, 2022 and 2023. Based on consultations with tax and legal advisors, management maintains that no provision is required at this stage.
No change to forecasts pending further clarity from the 3 Sep analyst briefing. Reiterate BUY with unchanged TP of RM16.04 based on DCF valuation (WACC: 7.1%, g: 2.0%).
With much of the downside already priced in, we see a compelling entry point, as the market appears to be largely pricing in a scenario of no IA approval, while any approval outcome could serve as a powerful re-rating catalyst.
Missed Expectations. Excluding net forex gain (-RM341.9m), net impairment loss on receivables (+RM19.6m), reversal of impairment loss on financial guarantee (-RM12.4m), and other adjustments (+RM6.7m), 2QFY25 core net profit (CNP) came in at RM830.1m (-22.4% QoQ, -47.2% YoY). This brought 6MFY25 CNP to RM1.9bn (-25.3% YoY), representing 45% of our full-year forecast and 40% of consensus estimates. The shortfall stemmed mainly from higher-than-expected operating costs, which compressed margins.
Dividends Maintained. The Group declared a first interim dividend of 25.0sen (2QFY24: 25.0sen).
Electricity Demand. Overall demand expanded 2.0% YoY in 2QFY25, supported by a robust 7.9% increase in the Commercial segment, which more than offset contractions in Industrial (-1.8%) and Domestic (-1.1%) consumption. The strength in the Commercial segment was likely underpinned by step-loaded demand from data centres.
QoQ. CNP dropped 22.4% QoQ, weighed down by higher operating expenses across both generation and non-generation lines, as well as higher depreciation (+3.5%). Generation cost rose 3.5% in tandem with 7.2% electricity demand growth, while non-generation costs jumped 8.8% on heavier repair works and ICT spend (software and cyber-security). As a result, EBIT margin (adjusted to include ICPT) contracted 1.6%-pts. Meanwhile, Genco’s PAT more than tripled, largely on lower tax expenses, as EBIT was broadly stable (-0.3% QoQ).
YoY/YTD. 2QFY25 CNP plunged 47.2% YoY/25.3% YTD, due to (i) higher depreciation expenses from asset build up, (ii) higher taxes following cessation of reinvestment allowance in 2025, (iii) the absence of the RM163m Southern Power Generation’s (SPG) LAD claim booked in 2QFY24, and (iv) the absence of RM213.7m hyperinflationary accounting gain from Türkiye associate in 2QFY24. The effective tax rate spiked to 29.8% in 1HFY25 (vs. 21.7% in 1HFY24). Meanwhile, ICPT swung into an over-recovery of RM764.5m in 1HFY25 (vs under-recovery of RM5.2bn in 1HFY24) as actual fuel costs undershot forecasts. Genco’s PAT slumped 76.0% YoY/62.0% YTD, reflecting the expiry of SJ Gelugor’s SLA in Aug 2024 and the absence of SPG LAD claim.
Reinvestment Allowance Tax Update. Following the precedent-setting Federal court ruling on 2 July, TENAGA disclosed that is has paid RM2.7bn in taxes for YA 2018, 2022 and 2023 (Figure 1). The Group is now seeking to reclaim this amount through its application for Investment Allowance (IA) under Schedule 7B for YAs 2003–2024, which remains under MoF review. Based on consultations with tax and legal advisors, management maintains that no provision is required at this stage. If all IA claims are rejected, maximum profit impact is RM10.0bn, with associated cash outflow of up to RM3.8bn. Including an additional c.RM681.8m Reinvestment Allowance (RA) claim for YA2024 for which the Notice of Assessment has not yet been issued by the IRB, the maximum tax exposure could rise to RM10.7bn, with cash outflow of up to RM4.5bn (Figure 2).
Outlook. We expect YoY earnings growth to be supported by higher allowed Capex under RP4, which expands the RAB and hence allowed return. Further upside potential arises from the deployment of contingent Capex, where management is confident of securing 60%-70% of the allocation under RP4. However, the risk of failed IA claims could raise tax expenses and weigh materially on earnings and dividends. Our stress tests suggest limited dividend risk in the base case (50% IA approved) and best case (100% IA approved), but material dividend pressure in the worst case (nil IA approved).
Earnings Revision. No change to forecasts pending further clarity from the 3 Sep analyst briefing.
Valuation and Recommendation. Reiterate BUY with an unchanged TP of RM16.04 based on DCF valuation (WACC: 7.1%, g: 2.0%). No ESG premium or discount has been applied, given the Group’s three-star ESG rating. We view the sharp share price retracement following the 2 July court ruling as an overreaction. TENAGA has fallen RM1.46/share below its pre-ruling close of RM14.90, already pricing in close to our worst-case earnings impact of RM1.84/share should none of the IA claims be approved. We view such an outcome as unlikely given TENAGA’s strategic importance as the national utility and history of regulatory support. With downside largely priced in, we see a compelling entry opportunity, while any progress on IA approvals could act as a powerful re-rating catalyst.
Risk. Sharp plunge in coal prices, unplanned shutdowns of power plants, weakening of Ringgit, policy risks.
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| Currency | Buy Rates (RM) | Sell Rates (RM) |
|---|---|---|
| USD | 4.202015 | 4.235318 |
| EUR | 4.910409 | 4.915416 |
| CNY | 0.591633 | 0.592086 |
| HKD | 0.539313 | 0.543090 |
| SGD | 3.271821 | 3.294958 |