RHB Investment Bank Bhd (RHB Research) has reiterated its BUY call on Tenaga Nasional Bhd (TNB) with a target price (TP) of RM16.60, representing a 17% upside from its current price of RM14.20. The research house expressed optimism over the higher capital expenditure (capex) announced under the Regulatory Period 4 (RP4) framework, alongside a maintained regulatory return rate of 7.3%. The new framework could drive a potential 5-7% upside in net regulatory returns if the full capex allocation is realised.
The government has approved the implementation of RP4 under the Incentive-Based Regulation (IBR) framework for the period from January 2025 to December 2027. A base tariff of 45.62 sen/kWh has been proposed, reflecting a 14% increase from the 39.95 sen/kWh set during RP3. This new tariff schedule is expected to come into effect on July 1, 2025, with any differences in the January to June period funded through Kumpulan Wang Industri Elektrik.
TNB’s capex under RP4 has been significantly raised to RM42.8 billion, including RM26.6 billion in base capex and RM16.3 billion in contingent capex. This translates to an average annual capex of RM14.3 billion, which is 108% higher than the approved capex in RP3. Operating expenditure has also been increased by 16% to RM20.8 billion to ensure the necessary operational and maintenance activities for TNB’s electrical infrastructure.
The company’s green energy initiatives also received a boost with the award of a 500MW large-scale solar photovoltaic plant under the fifth large-scale solar bidding round, which strengthens its domestic renewable energy footprint.
RHB Research highlighted that the higher capex allocation exceeded expectations, signalling a positive outlook for TNB’s future earnings. However, further clarity on whether the company will fully realise the regulated net returns based on total allowed capex is awaited. Despite this, the research house has maintained its earnings estimates while incorporating a 6% ESG discount into its valuation.
The TP of RM16.60 is derived from a discounted cash flow (DCF) model, implying 1.55 times the financial year of 2025 forecast price-to-book value ratio (+1 standard deviation from its 10-year mean). RHB Research has cautioned about potential downside risks, including higher operating costs and greater-than-expected plant outages.
With the RP4 framework and strategic initiatives in place, TNB appears well-positioned to sustain its upward trajectory and deliver value to its stakeholders.
