Tenaga Nasional Berhad（TNB）: Promising Future in Line with Environmental Trends

Since the beginning of 2024, the stock price of TNB has soared by 40.48%, far exceeding the 11.05% increase in the Malaysian index. This is a very high growth level in the relatively illiquid Malaysian market.

Based on the analysis of major banks and my personal analysis, I believe that the sharp rise in TNB's stock price is a product of the national macroeconomic drive and the company's own development optimization.

The following are detailed explanations:

Macro-economically, Malaysia is actively promoting national energy transformation. With the recovery of the economy from the COVID-19 impact from 2020 to 2022, the power demand in the Asia-Pacific region will continue to rebound in 2023. Malaysia's power demand in the peninsula has increased by 9.6% year-on-year, mainly driven by the domestic and commercial sectors. Analysts predict that strong power demand growth will continue for the rest of this year. Currently, about 40% of Malaysia's electricity comes from gas-fired power plants, slightly more than 50% comes from coal-fired power plants, and the rest comes from hydropower, oil, distillate, and renewable energy. TNB is committed to energy transformation, especially the transition to renewable energy. The global increase in clean energy and decarbonization trends may increase market interest in TNB stocks and boost stock prices.

In terms of its own business, in the first quarter of 2024, TNB achieved healthy revenue growth, with revenue increasing by 8%; non-generation operating expenses decreased by about 20% in 1Q24, and management and maintenance costs decreased significantly. The increase in power generation and the change in the company's blended generation cost also matched well. However, due to the increase in foreign exchange losses and tax expenses (the effective tax rate reached 34%), net profit was slightly affected. Most importantly, TNB is committed to expanding large-scale renewable energy in Malaysia and internationally, and solving the decarbonization problems of existing assets. Currently, the company plans to increase the renewable energy capacity to 32% of the total generation capacity by 2025 (20% by 2023), and the revenue contribution of renewable energy to reach 19%.

As of December 31, 2023, TNB's EPS was 0.48 Malaysian ringgit. Looking ahead to the next two years, JP Morgan has given an optimistic forecast of 0.60/0.71, with a year-on-year growth rate of around 50%. This forecast is mainly based on the following logic:

1. Cost savings: JP Morgan noted that TNB achieved cost savings in the first quarter of 2024, especially the significant decrease in non-generation operating expenses, which helps to improve the company's profitability.

2. Stable generation costs: According to the latest announcement, despite some cost pressures, stable generation costs help TNB maintain its profitability.

3. International business contribution: TNB's international business, particularly the growth in solar power generation, brings additional sources of revenue for the company, which may have a positive impact on EPS.

4. Regulatory environment: JP Morgan may have considered the potential impact of the regulatory environment on TNB's earnings, including the return mechanism for regulatory periods (RP) discussed with regulatory agencies.

5. Market demand growth: JP Morgan expects market demand growth to drive TNB's sales growth, thereby increasing EPS.

Currently, JP Morgan has given TNB a valuation of 14.50 Malaysian ringgit, which means there is still some room for TNB's stock price to rise compared to the current price of 13.76. TNB has maintained a dividend payout ratio policy of 30% to 60%. The company has paid a total of 63 dividends in its history, with a dividend payout rate of 100% and a frequency of twice a year. Currently, the dividend yield is 3.34%, not too high in the utility sector but reasonable based on the high stock price. As of the end of 2023, TNB had a free cash flow of 21.64 billion Malaysian ringgit, which provides sufficient funds for the company's dividend payments.

JPMorgan Chase has given this company an "Overweight" rating. With the increased visibility of the National Energy Transition Roadmap, including coal retirement and increased Renewable Energy capacity, TNB's long-term growth potential will become increasingly prominent in its price.