Significant upside potential to TNB’s earnings expected
PETALING JAYA: The 10% pullback in Tenaga Nasional Bhd’s (TNB) share price over the past month provides a “compelling buying opportunity”, says CGS International (CGSI) Research.
It added that TNB is a liquid large-cap index-linked proxy to two key themes, namely the National Energy Transition Roadmap and the surging foreign direct investments (FDIs) into the country.
“As the owner and operator of the national power grid, we see significant upside potential to its earnings via higher regulated returns from the incremental RM35bil that is earmarked by TNB for grid upgrades to cope with the energy transition into renewables.
“We estimate these investments can add at least RM1.2bil incremental earnings per year once fully spent by 2030, under the Incentive Based Regulation framework, which represents about 35% of its average 2022 to 2023 normalised net profit of RM3.3bil.”
CGSI Research also noted that TNB is an “indirect play” for the surge in FDI approvals, particularly in the electrical and electronics sector and data centres.
Such an influx would drive a notable increase in power draw, adding another layer of transmission and distribution capital expenditure requirements to cope with this demand.
Looking ahead, the research house expects several catalysts to unfold within the Malaysian utilities space over the next six to 12 months, which should further solidify TNB’s growth prospects.
These include details on the third-party access mechanism which could enhance market opportunities for TNB’s GenCo business and electricity exports via the commencement of the energy exchange.
Other catalysts are the fifth cycle of large-scale solar capacity awards and information on key regulatory and financial parameters for the next regulatory period which could help crystallise TNB’s longer-term earnings prospects.
Commenting on the ringgit, CGSI Research said the strengthening of the local currency would be beneficial for the utility giant.
“We estimate that every 5% favourable movement in the foreign currency exchange rate translates into a 1.4% reduction in overall interest costs for the group, on average.”
The research house highlighted that about 28% of TNB’s total outstanding debt is in foreign currencies, primarily US dollar and pound, and to a lesser extent, yen, Australian dollar and euro.
Since end-June, the ringgit has appreciated by 2.7% to 5.9% against these currencies, except yen.
“If sustained, this should translate into interest expense savings moving forward,” added CGSI Research.
It has maintained its “add” call on TNB, with a target price of RM15.60 per share.
