We upgrade Tenaga Nasional (TNB) to HOLD from UNDERWEIGHT with a higher target price of RM14.18/share (vs. RM12.60/share previously). We believe that TNB deserves to trade higher than its five-year average PE of 16x as the operational parameters under RP4 (2025F to 2027F) are more favourable than previous RPs. For instance, the allowable demand growth under RP4 is estimated to be 4.5% to 4.7% vs. 1.7% for RP3. Contingent capex of RM16.3bil over three years is also allowed to be claimed back under RP4 although the recovery mechanism has yet to be finalised.

• HOLD with a higher TP of RM14.18/share (vs. RM12.60/share previously). We have applied a PE of 18x on TNB's FY26F EPS of 78.8 sen to arrive at its TP of RM14.18/share. The PE of 18x is slightly above the five-year average of 16x. We think that TNB deserves to trade at a premium as its earnings are increasingly secured and defensive underpinned by the favourable parameters under RP4.
• Contingent capex is expected to pick up in 2HFY25. We believe that most of the contingent capex would be in respect of energy transition e.g. batteries and distribution automation systems and project roll-outs such as data centres and schools. Contingent capex is estimated to be RM1bil to RM2bil in FY25F (1QFY25: RM128mil).
• Fuel margin gains in 2QFY25? As coal prices have stabilised, we believe that TNB would be recording fuel margin gains in 2QFY25 in contrast to losses of RM33.7mil in 1QFY25. Hence, we expect GenCo to record a higher net profit in 2QFY25 compared to only RM25.4mil in 1QFY25 (FY24: RM178.9mil). According to Bloomberg, Newcastle coal price has risen by 8.3% so far in 2QFY25.
• Trade debtors are declining. Trade debtors are not expected to be a major issue as it has declined from RM5.1bil as at end-March 2024 to RM4.4bil as at end-March 2025. Out of the RM4.4bil, about 34.1% have been outstanding for more than five months. Also out of the RM4.4bil, roughly 39% came from the residential sector.

Source: AmInvest Research - 23 Jun 2025