TNB’s robust 1H24 performance spurs analysts to reaffirm ‘Buy’ ratings

BOTH CIMB Treasury and Market Research (CIMB Research) and RHB Investment Bank Bhd (RHB Research) have reaffirmed their ‘Buy’ ratings on Tenaga Nasional Bhd (TNB), reflecting strong confidence in the company’s impressive performance and promising prospects in Malaysia’s evolving energy sector.

This endorsement highlights TNB’s solid earnings for the first half of 2024 (1H24) and its strategic positioning to benefit from Malaysia’s energy transition.

Strong Performance in 1H24

TNB reported a notable performance for 1H24.

CIMB Research highlighted that TNB achieved a core net profit of RM2.43 billion, marking a remarkable 44% year-on-year (YoY) increase.

This significant growth was attributed to “stronger-than-expected generation segment earnings and associate earnings,” with gains driven by “fuel margin normalisations”, lower net interest expenses and a substantial 13-fold rise in associate results to RM265 million.

Similarly, RHB Research reported that TNB’s core earnings of RM2.2 billion for 1H24, up 24% YoY.

This performance, it said, exceeded expectations due to “better-than-expected contributions from the domestic generation segment and higher-than-expected revenue.”

RHB Research noted a strong recovery in core profit for the second quarter (2Q), which surged by 45% quarter-on-quarter and 59% YoY, driven by improved operational numbers and reduced negative fuel margins, though higher depreciation and tax expenses were noted as offsetting factors.

Key Drivers of Growth

Both research houses identify key factors driving TNB’s impressive results.

CIMB Research noted a significant growth in electricity demand in Peninsular Malaysia, with a 6.3% increase in 2Q24 compared to the same period last year.

This growth was primarily led by the domestic sector — which saw a 7.7% rise — and the commercial sector — which experienced an 8.8% increase.

Additionally, reduced fuel costs contributed to enhanced profitability, with TNB’s fuel expenses falling by 21.8% YoY, largely due to a 23.5% drop in coal prices.

RHB Research echoed these findings, reporting that electricity demand peaked at 20,066 megawatts in July 2024, driven by both commercial and domestic sectors.

The report also highlighted TNB’s stable renewable energy (RE) capacity of 4.3-giga-watt (GW), which accounts for 21% of its total capacity, with an additional 6.2GW of RE capacity in various stages of development. This expansion supports Malaysia’s broader energy transition goals.

Strategic Outlook and Investments

Both research houses noted TNB’s strategic position within Malaysia’s energy transition framework.

CIMB Research notes that TNB is well-positioned to benefit from Malaysia’s decarbonisation agenda, with increased Regulated Asset Base due to higher investments in grid infrastructure and enhanced contributions from its generation business.

TNB’s efforts to upgrade transmission and distribution assets are aligned with the growing demand driven by new data centre developments and other infrastructure needs.

RHB Research similarly anticipates significant benefits for TNB from ongoing developments in the energy sector.

RHB Research discusses potential regulatory changes under Regulatory Period (RP) 4, expected by the end of 2024, which could impact tariffs and capital expenditure.

It estimates that average regulated capital expenditure will increase by 25%-40%, reaching RM8.6 billion to RM9.6 billion annually, driven by a higher demand growth of 3%-4% and an unchanged weighted average cost of capital at 7.3%.

The analysis suggests that regulatory net returns could increase by 1.34% for every RM1 billion rise in average annual capex.

Investment Thesis and Risks

CIMB Research maintains a target price of RM15.27 for TNB, reflecting a positive outlook on the company’s performance and benefits from energy transition initiatives.

The research house highlights TNB’s strong earnings growth and role as a key beneficiary of the government’s decarbonisation strategy.

However, potential risks include an “unfavourable outcome for Regulatory Period 4 (RP4, 2025-2027)” and “delayed resolution of its Manjung coal plant outage.”

RHB Research sets a target price of RM16.70 for TNB, implying a 20% upside potential from the current market price of RM13.90.

This valuation includes a 6% environmental, social and governance discount and reflects confidence in TNB’s future performance.

The report notes an improvement in TNB’s foreign shareholdings to 15.3% as of July 2024, up from 12.5% at the end of 2023, although still below the peak of 28.7% recorded in 2016.

RHB also identifies potential downside risks, including “higher operating costs and greater-than-expected plant outages.” — TMR