UOB Kay Hian Private Limited
Date of Report: Friday, 08 August 2025

Tenaga Nasional Berhad: Unlocking Renewable Energy Growth and Navigating Regulatory Shifts in Malaysia and Australia

Company Snapshot: Tenaga Nasional Berhad (TNB MK)

• Sector: Utilities
• Bloomberg Ticker: TNB MK
• Market Capitalization: RM80,209 million (~US\$18.93 billion)
• Shares Issued: 5,812.9 million
• Major Shareholders:
  • EPF: 18.7%
  • Khazanah Nasional: 18.1%
  • Amanah Saham Nasional: 12.3%
• 52-week High/Low: RM15.24 / RM12.60
• Current Share Price: RM13.76
• Target Price: RM16.30 (Upside: 18.5%)

Renewable Energy Expansion: Australia and Beyond

Tenaga Nasional Berhad is accelerating its global renewable energy (RE) ambitions with a strategic focus on Australia. A recent site visit to Spark Renewables, TNB’s wholly-owned subsidiary in Sydney, highlighted Australia’s aggressive RE transition targets—aiming for an 82% renewable energy mix by 2030 from 38% in 2024. This shift is set to unlock multi-year opportunities in wind and solar development and transmission infrastructure.

• Spark Renewables Portfolio:
  • Operates the 120MW Bomen Solar Farm in Wagga Wagga, New South Wales
  • 310,000 solar panels powering up to 36,000 homes annually
  • In operation since 2000
• Future Pipeline:
  • 2GW of greenfield RE projects under development in New South Wales
  • Key projects:
    • 1,000MW Dinawan Energy Hub
    • 400MW Mallee Wind Farm
    • 600MW Wattle Creek Energy Hub

TNB currently boasts an established 4.3GW RE portfolio (52% of its target), with 6.2GW in the pipeline split between domestic (3.3GW) and international (1.0GW) initiatives.

Financial Performance and Outlook

The outlook for Tenaga Nasional’s financial performance remains positive. For the first half of 2025, TNB is expected to deliver net profit growth of 5-8% year-on-year, buoyed by the absence of tax provisions following a favorable court ruling and increased regulated capex under Regulatory Period 4 (up 29%).

Investors can anticipate an interim dividend per share (DPS) of at least 25 sen/share in 1H25, signaling robust underlying cash flow and strong capital management.

Key Financials Table

Tackling Regulatory and Tax Challenges

Tenaga is currently disputing a RM7 billion net tax bill following a Federal Court ruling for the years 2003-2024. The Income Revenue Board (IRB) disallowed TNB’s claim under Schedule 7A on the grounds that its operations are utility-related, not manufacturing, suggesting that TNB should be considered under Schedule 7B of the Income Tax Act 1967.

• TNB is actively engaging with relevant authorities to seek approval for submission under Section 7B, with a decision expected by the end of August 2025.
• Tax experts and legal opinion indicate that TNB has a strong case for Section 7B submission.

Operational Efficiency and Cashflow Management

The automatic fuel adjustment (AFA) mechanism, while neutral to earnings, is positive for cashflow. It shortens collection periods from the government and consumers, enhancing cash conversion rates. This improved liquidity positions TNB for a higher dividend payout, currently at 40-60% of normalized net profit.

Regulatory Period 4 offers strong core earnings visibility, with a projected three-year earnings CAGR of 7%.

Risks and Earnings Revision

• No earnings revision was made in the latest outlook.
• Key risks to consider:
  • Lumpy and potentially unprofitable overseas RE projects
  • Foreign exchange risk to operating cashflow

Valuation and Investment Recommendation

TNB maintains a BUY rating with a DCF-based target price of RM16.30 (discount rate: 8%, growth rate: 1%). The equity risk premium was recently lowered from 8.2% to 7.8%, reflecting increased tariff autonomy and gradual decoupling from government control.

• At target price, TNB trades at 17.3x 2025F EPS, +2SD above five-year mean PE.
• Key Re-rating Catalysts Include:
  • Autonomy for TNB to change electricity prices by 7% without Cabinet approval every six months
  • Recognition of contingent capex in the 2026-27 earnings window
  • Potential listing of a profitable generation or RE division
  • Earnings-accretive mergers and acquisitions

ESG Initiatives: Environmental, Social, and Governance Commitment

Environmental

• Targeting 8,300MW RE generation capacity by 2025 (up 1.9x from 4.3GW in Dec 2024)
• Pledged 35% emission intensity reduction by 2035 and net zero emissions, coal-free by 2050
• 2024 initiatives:
  • Planted 49,214 trees, sequestering about 1,900 tCO2e
  • Commissioned 64.09MWp of rooftop solar
  • Added 54 new EVs for fleet electrification

Social

• 2024 donations:
  • RM0.5m to 962 underprivileged families
  • RM0.7m of school supplies benefiting 6,640 students
  • RM40m for lighting up 14,210 village streetlights
  • Over RM59m for development and resettlement of 243 orang asli households

Governance

• Emphasis on transparency, anti-bribery, and whistle-blowing policies

Profitability and Growth Metrics

Conclusion: Tenaga Nasional’s Investment Thesis

Tenaga Nasional Berhad stands out as a robust utility play with strong earnings visibility, progressive renewable energy strategy, and prudent cashflow management. The company’s aggressive expansion in Australia, steadfast ESG commitments, and anticipated regulatory autonomy position it for sustainable long-term growth. With an attractive upside and resilient dividend outlook, TNB remains a compelling pick for investors seeking exposure to the evolving energy landscape in Malaysia and abroad.