KUALA LUMPUR (Dec 27): Shares of Tenaga Nasional Bhd (KL:TENAGA) rose on Friday to their new record high as analysts flagged potential earnings upside from implementation of Regulatory Period 4 (RP4).
Tenaga climbed as much as 86 sen or 6% to RM15.04. The stock was trading at RM14.86 at 10.30am, giving the national electric utility a market capitalisation of RM86 billion. Trading volume totalled 7.1 million shares so far.
The increase in approved capital expenditure will accelerate Tenaga’s regulated asset base growth while the inclusion of contingency spending in RP4 could provide further upside to earnings, analysts said.
“Overall, we are positive on the RP4 announcement” due to the higher capex, said RHB Investment Bank. “However, pending further disclosure, we are still uncertain whether the company will be entitled for the full total regulated net returns based on total allowed capex.”
Under the 'incentive-based regulation' mechanism, the base tariff is reviewed every regulatory period lasting three years. The regulatory period from 2025 to 2027 — RP4 — will see a 14% increase in base tariff, the company said on Thursday.
Capex, meanwhile, is set at RM42.82 billion, consisting a base of RM20.78 billion and contingency of RM16.3 billion. The average capital expenditure approved under RP4 more than doubles that under RP3 and the allowed operating expenditure of RM20.78 billion is up 16% from RP3.
Tenaga did not provide details on the contingency spending, though “we believe they could include investments such as battery energy storage systems, contingent on the technology becoming more commercially viable,” said Apex Securities.
In a best-case scenario where the capex including contingency is fully utilised, the annual average allowed return could rise over 10%, equivalent to an additional RM500 million in returns annually, the research house said.
Shares of Tenaga, which has near-monopoly of the country’s electricity distribution, have surged 48% so far this year as strong economic growth boosted demand for power. News reports of mushrooming power-hungry data centres have also boosted investors' sentiment.
Most analysts are still bullish on Tenaga with 16 ‘buy’ recommendations, six ‘hold’ ratings, and only one ‘sell’ call. The consensus target price is RM16.18, according to Bloomberg, implying potential returns of nearly 9% in the next 12 months.
“The latest development underscores our thesis of Tenaga being one of the key beneficiaries of the energy transition from a step-up in grid capex given its monopoly of the domestic power grid infrastructure,” said TA Securities.
The research house is broadly positive on RP4 based on the initial details shared by Tenaga given the step-up in RP4 allowable capex. A sustained allowable rate of return, meanwhile, underpins the company’s regulated earnings growth, it added.