Despite having paid RM2.7bn in disputed tax in 3QFY25 to date, management emphasised that the payments will not compromise capex or dividend commitments, with gearing expected to remain within thresholds that preserve credit ratings.
Data centre momentum remains strong, with 253MW of new ESA demand secured in 3QFY25 QTD.
FY25 electricity demand growth projection was revised down to 2.8–3.8% (from 3.5–4.5%). The downward revision reflects a high 2024 base and soft 1QFY25 start, though demand has since stabilised. Importantly, the revised range remains within RP4 projections.
2HFY25 opex should remain broadly in line from 1HFY25 levels, diverging from the historical back-end loaded trend and providing improved cost visibility and predictability.
FY25 capex guidance has been trimmed to RM18bn (RM12bn regulated, RM6bn unregulated) from RM20bn, with the RM2bn cut entirely from unregulated projects due to timing deferrals into early-2026 rather than cancellations.
We have revised our earnings forecasts by -5.6%/-2.8%/-1.4% for FY25/FY26/FY27 respectively, factoring in the incremental borrowings required to fund these tax outflows.
Following our earnings adjustments, we lower our TP to RM15.77 (from RM16.04) based on DCF valuation (WACC: 7.1%, g: 2.0%), implying 22x FY26F EPS. Reiterate BUY.
We left TENAGA’s analyst briefing with the following key takeaways:
No Concerns on Credit Worthiness. Tenaga has paid RM2.7bn in disputed taxes relating to YA2018, 2022, and 2023 in 3QFY25 to date (QTD). Payments were made on a “without prejudice” basis pending resolution of Schedule 7B claims (Figure 1), with no provision recognised following consultations with tax and legal advisers. As such, we expect the amount to be recorded as tax recoverable on the balance sheet. While financed through borrowings, management emphasised that the payments will not compromise capex or dividend commitments, with gearing expected to remain within thresholds that preserve credit ratings. We understand that credit rating agencies treat lease liabilities as part of total debt in their assessments, and no concerns have been raised regarding Tenaga’s credit profile.
253MW ESA Signed in 3QFY25 QTD. After a subdued 2QFY25, where only c.40MW of new data centre ESAs were signed (by our estimates), momentum has accelerated in 3QFY25 QTD with two projects collectively securing 253MW of maximum demand. While we expect the signing pace to moderate going forward due to grid constraints and potential tariff headwinds, attention will shift to execution as data centres are built and progressively load up on power. Notably, load utilisation rose to 603MW in 2QFY25 (+24% QoQ) (Figure 2), underscoring the structural step-up in data centre demand.
Slower Demand Growth Projection. 1HFY25 electricity demand expanded modestly by 0.4% YoY, lifted by strong Commercial demand (+6.5%) that offset declines in Industrial (-3.6%) and Domestic (-2.5%) segments (Figure 3). Commercial demand was likely driven by incremental data centre loads. Management revised FY25 electricity demand growth guidance down to 2.8–3.8% (from 3.5–4.5%), aligned with BNM’s lower GDP growth forecast of 4.0–4.8% (from 4.5–5.5%). The downward revision reflects a high 2024 base and soft 1QFY25 start, though demand has since stabilised. Importantly, the revised range remains within RP4 projections (2025: +2.8% YoY to 134,560 GWh).
Opex Expected to Stabilise. Non-generation opex rose 8.8% QoQ in 2QFY25, driven by higher repair and maintenance costs (+11.2%) and general expenses (+21.9% from higher ICT expenses, mainly software and cyber-security) (Figure 4). Management guided that 2HFY25 opex should remain broadly in line from 1HFY25 levels, diverging from the historical back-end loaded trend and providing improved cost visibility and predictability.
Capex Guidance Reduced by RM2bn. FY25 capex guidance has been lowered to RM18bn (RM12bn regulated, RM6bn unregulated) from RM20bn previously, with the entire reduction stemming from unregulated capex (RM8bn previously). Management clarified this reflects timing deferrals into early-2026 rather than project cancellations. Key unregulated projects include the Nenggiri Hydro Project (300MW, COD: 2QFY27) and the Sungai Perak Hydro Life Extension Programme (700MW, first unit 8MW COD: 4QFY26). We believe some deferments may have been influenced by the disputed tax payments. Meanwhile, c.RM250m of contingent capex was deployed in 1HFY25, with recovery mechanisms under discussion with the regulator.
Earnings Revision. We incorporate the RM2.7bn in disputed taxes already paid, together with an additional RM681.8m in tax payable once the reinvestment allowance (RA) claim for YA2024 is assessed by the IRB (likely by year-end), as well as lower demand assumptions in line with management guidance. Consequently, we have revised our earnings forecasts by -5.6%/-2.8%/-1.4% for FY25/FY26/FY27 respectively, factoring in the incremental borrowings required to fund these tax outflows.
Valuation and Recommendation. Following our earnings adjustments, we lower our TP to RM15.77 (from RM16.04) based on DCF valuation (WACC: 7.1%, g: 2.0%), implying 22x FY26F EPS. Reiterate BUY. 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 RM1.66/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 | 4.212894 | 4.246402 |
| EUR | 4.925348 | 4.934954 |
| CNY | 0.592662 | 0.593823 |
| HKD | 0.542079 | 0.546393 |
| SGD | 3.250847 | 3.276896 |