• Keep BUY and MYR16.60 TP, 17% upside and 4% FY25F yield. Overall, we are positively surprised by the higher capex announced under the Regulatory Period 4 (RP4) while the rate of return remained unchanged at 7.3%. We see an upside of 5-7% to our net regulatory return estimates if the full capex numbers are pencilled in. Separately, we are also positive on the 500MWa.c. large scale solar photovoltaic plant (LSSPV) under the fifth large scale solar (LSS5) bidding round which will continue to strengthen its domestic green footprint.
• RP4 is out. The Government approved the implementation of the RP4 under the Incentive Base Regulation (IBR) framework for the period of Jan 2025 to Dec 2027. The new tariff schedule with a base tariff of 45.62 sen/kWh for RP4 is proposed to be implemented starting 1 Jul 2025 and any differences from Jan-Jun 2025 will be funded through Kumpulan Wang Industri Elektrik (KWIE).
• Higher base tariff and capex. The announced base tariff is 14% higher than 39.95sen/kWh in Regulatory Period 3 (RP3). The allowed capex is MYR42.8bn, which consists of MYR26.6bn base capex and MYR16.3bn contingent capex. This translates to MYR14.3bn average annual approved capex, which is 108% higher than the approved capex in RP3, of which base tariff is already 29% higher than the RP3-approved capex. The allowed opex was also lifted by 16% to MYR20.8bn as compared to RP3 in order to support the planning and execution of necessary operational and maintenance activities for all of TNB's electrical infrastructure. The regulatory rate of return has been maintained at 7.3% as per RP3.
• Positive surprise and potential earnings upside. Overall, we are positive on the RP4 announcement as the total allowed average annual capex of MYR14.3bn was higher than our expectations of MYR8.6bn to MYR9.6bn. However, pending further disclosure by TNB, we are still uncertain whether the company will be entitled for the full total regulated net returns based on total allowed capex. We maintain our earnings estimate for now but we see an upside of 5-7% to our net regulatory returns if the full capex numbers are being pencilled in. Our DCF-based TP is kept at MYR16.60, with a 6% ESG discount included. Our TP also implies 1.55x FY25F P/BV (+1SD from its 10-year mean). Downside risks: Higher operating costs and greater-than-expected plant outages.

Source: RHB Research - 27 Dec 2024