Tenaga Nasional Berhad - DC Demand and GenCo Underpin Structural Momentum
Tue, 26-May-2026 07:10 am
by Research Team • Apex Research

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TENAGA (5347)

Target Price (RM)

16.70

Recommendation

Buy

  • 1QFY26 Within Expectations: CNP of RM1.16bn (+8.2% YoY, -16.0% QoQ), at 25.5% of our FY26F forecast and 23.8% of consensus. Revenue rose 6.6% YoY to RM17.1bn on 7.0% demand growth led by the Commercial sector (+13.0%). GenCo PAT surged to RM333.7m (1QFY25: RM25.4m) on improved plant performance.

  • Outlook Supportive: FY26 capex guided at RM18.0bn (RM13.0bn regulated, RM5.0bn non-regulated) with RAB expanding toward RM76.9bn under the RP4 framework. The secured DC pipeline of c.7.5GW anchors structural demand, while the AFA mechanism improves cash flow predictability. Cross-border energy flows via the ASEAN Power Grid further position TNB as a regional grid landlord.

  • Earnings & Valuation: FY26–28 CNP revised to RM4.48bn/RM4.59bn/RM5.62bn on post-AR housekeeping. Maintain BUY, TP RM16.77 unchanged (DCF rolled forward to FY26F–FY35F; WACC: 7.2%, g: 1.7%).

Within Expectations. Excluding forex translation gains (+RM21.6m), net loss on impairment of receivables (-RM60.2m), and inventory obsolesce (-RM37.4m) among others, TENAGA reported a 1QFY26 core net profit (CNP) of RM1.16bn (+8.2% YoY, -16.0% QoQ). The result was in line with our expectations at 25.5% of FY26F forecasts, and broadly consistent with consensus at 23.8%. The QoQ decline was expected given the elevated 4QFY25 base, which benefited from insurance claims recovery (RM573.3m in other operating income) and a low effective tax rate.

 

QoQ. CNP declined 16% QoQ from RM1.16bn, primarily due to (i) the absence of 4QFY25’s elevated other operating income from GenCo insurance claims recovery, which fell from RM573.3m to RM187.4m, (ii) the normalisation of the effective tax rate to 30.5% from 4QFY25’s exceptionally low 9.0%, and (iii) the reversal from 4QFY25’s forex gains of RM318.0m to a modest RM31.1m. On an operational level, EBITDA was resilient at RM5.52bn (+1.7% QoQ) with margin improving 140bps to 34.0%, supported by lower fuel costs and stable non-generation opex.

 

YoY. CNP expanded 8.2% YoY, supported by a 6.6% increase in revenue to RM17.1bn, driven by higher electricity sales across the Commercial (+13.0%), Domestic (+9.7%), and Others (+142.8%) sectors. The Commercial sector’s growth was led by data centre loads, retail, and business services. This was partially offset by a 10.2% decline in Industrial demand, attributable to softer metal manufacturing and cement products. EBITDA grew 6.5% to RM5.52bn with margin expanding 130bps to 34.0%, reflecting the higher revenue base and lower fuel costs. Total fuel and power purchase costs fell 3.2% YoY to RM7.75bn, as average delivered coal prices declined 4.2% to USD100.3/MT (CIF). However, finance income fell 81.6% to RM31.4m due to lower fixed deposit balances following the RM5.3bn tax-related cash outflows in 3QFY25. The effective tax rate improved to 30.5% from 33.0% in 1QFY25, reflecting partial benefits from the Schedule 7B Investment Allowance but remained above the statutory rate due to non-deductible tax expenses.

 

Cashflow and Balance Sheet. Net debt improved RM1.6bn QoQ to RM44.5bn despite total debt rising RM1.4bn to RM60.5bn, implying a c.RM3.0bn rebuild in cash balances. Net gearing fell 190bps to 39.3%, with effective borrowing cost steady at 4.62% (FY25: 4.63%) on a 95:5 fixed-to-floating ratio. Group capex of RM3.26bn (1QFY25: RM3.20bn) included RM2.47bn in regulated capex, lifting the RAB to RM76.9bn. Trade receivables were stable at RM4.1bn with ACP improving to 26 days (Mar'25: 27 days).

 

Electricity Demand Growth.  Peninsular Malaysia electricity demand grew 20.6% YoY to 33,710 GWh, marking the strongest quarterly growth since 1QFY24 (+9.6%). Demand growth was primarily driven by the Commercial sector (+13.0%), reflecting structural load growth from data centre expansions, retail activity, and business services. Domestic demand rose 9.7%, while Industrial demand declined 2.1% due to softer output from metal manufacturers and cement producers. Peninsular peak demand reached 21,469 MW (recorded 23 Apr 2026), a new all-time high. The sector mix continued to tilt toward Commercial, now representing 39% of total sales (1QFY25: 37%), consistent with the structural shift from DC-driven load growth.

 

Generation Business. GenCo was the quarter’s standout performer. Revenue rose 5.7% YoY to RM6.04bn, EBIT surged 81.9% to RM665.1m, and PAT jumped to RM333.7m from RM25.4m in 1QFY25. Normalised for MFRS16 and forex translation, GenCo PAT reached RM322.3m (1QFY25: RM68.2m), a 4.7x improvement driven by higher units generated from improved plant performance. The generation mix shifted materially, with gas rising to 39.4% (1QFY25: 34.4%) at the expense of coal, which fell to 54.4% (1QFY25: 58.0%), reflecting both planned optimisation and lower hydro output (2.9% vs 5.2%).

 

Outlook. We expect sequential earnings growth to be supported by a higher RAB expanding toward RM76.9bn under the RP4 framework, with management guiding for FY26 total capex of RM18.0bn (RM13.0bn regulated, RM5.0bn non-regulated) and a utilisation target of 80–85% of the RM42.82bn RP4 allocation. The secured DC pipeline of c.7.5GW of maximum demand remains the key structural demand driver. The Automatic Fuel Adjustment (AFA) mechanism enhances cash flow predictability, while the monthly recalibration of fuel cost pass-through reduces ICPT working capital volatility. Internationally, TNBI’s EBITDA improved to RM118.2m (1QFY25: RM111.3m), driven by stronger wind asset contributions, and the group remains focused on converting its RE development pipeline into operational assets. Cross-border energy flows via the ASEAN Power Grid, including the Malaysia-Singapore interconnection (COD 2029–2030), continue to position TNB as a regional grid infrastructure landlord. Malaysia’s GDP growth forecast of 4.0–5.0% for 2026 supports continued demand resilience.

 

Earnings Revision. We have made minor housekeeping adjustments to our FY26–28 CNP estimates following the release of the FY25 Annual Report, revising to RM4.48bn/RM4.59bn/RM5.62bn (from RM4.54bn/RM4.66bn/RM5.25bn). The FY26–27 trims of 1.2–1.6% reflect updated depreciation and non-generation cost assumptions, while FY28 is raised 7.0% on a more constructive view of RAB-driven revenue accretion in the outer year. These changes are not driven by the 1QFY26 results, which were in line with expectations. We continue to model a 24% effective tax rate for FY26F onwards under the Schedule 7B IA framework, though we note the 1QFY26 ETR of 30.5% implies heavier tax benefits are likely to be recognised in subsequent quarters.

 

Valuation and Recommendation. We reiterate BUY with an unchanged TP of RM16.77, derived from our DCF model now rolled forward to FY26F–FY35F (WACC: 7.2%, g: 1.7%, from 2.0% previously). The lower terminal growth rate reflects a more conservative long-run assumption, offset by the rollforward effect and the upward revision to FY28F earnings. No ESG premium or discount is applied, consistent with the Group's three-star rating. At RM14.46, TNB trades at 16.9x FY26F PE, which is reasonable for a regulated utility with structural earnings upgrade catalysts still unfolding - namely RP4 RAB growth, Schedule 7B tax efficiency, DC-driven demand acceleration, and emergent gas infrastructure optionality from the Lumut RGT discussions. 

 

Risk. Rapid plunge in coal prices, unplanned shutdowns of power plants, weakening of Ringgit, policy risk.

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