Investments In Renewable Energy Will Improve Future Sustainability And Efficiency

Key Takeaways

• Strong electricity demand growth surpassing GDP indicates potential revenue increases from industrial and commercial sectors.
  
• Investments in renewable energy and efficiency improvements likely enhance revenue, reduce carbon intensity, and improve net margins.
  
• Increased competition and strategic shifts towards renewables pose risks to growth, profitability, and stable cash flow, with geopolitical and market-specific challenges.

Catalysts

Engages in the generation, transmission, distribution, and sale of electricity in Malaysia and internationally.

• TNB is experiencing strong electricity demand growth that surpasses GDP growth, suggesting potential future revenue increases driven by the industrial and commercial sectors.
  
• Investments in renewable energy (RE) and improvements in generation capacity, including significant projects like the hybrid hydro floating solar plants and the overseas solar project in the U.K., are expected to reduce carbon intensity and enhance the company’s revenue and margins through lower operating costs and increased energy output.
  
• The ASEAN Power Grid initiative and cross-border electricity export agreements, such as the one with Singapore, provide new revenue streams, increasing potential earnings with regional power sales, especially from green energy sources.
  
• TNB’s focus on energy transition, including investments in battery storage and energy-efficient grid technologies, is likely to contribute to cost savings and operational efficiency gains, thereby potentially improving net margins.
  
• The strategic push towards decarbonization and clean generation will likely align Tenaga Nasional with emerging sustainability trends, potentially improving its valuation by attracting investment focused on ESG (Environmental, Social, and Governance) initiatives.

Tenaga Nasional Berhad Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Tenaga Nasional Berhad's revenue will decrease by -1.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.6% today to 8.5% in 3 years time.
• Analysts expect earnings to reach MYR 5.4 billion (and earnings per share of MYR 0.94) by about January 2028, up from MYR 4.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting MYR 6.9 billion in earnings, and the most bearish expecting MYR 4.3 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.8x on those 2028 earnings, up from 20.1x today. This future PE is greater than the current PE for the MY Electric Utilities industry at 20.6x.
• Analysts expect the number of shares outstanding to decline by 0.54% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.04%, as per the Simply Wall St company report.

Tenaga Nasional Berhad Future Earnings Per Share Growth

Risks

• The increasing competition from companies like Gentari in the renewable energy sector may limit Tenaga Nasional Berhad's ability to capture significant growth in the domestic renewable energy market, potentially impacting future revenue and market share.
  
• The company's shift towards renewable energy and the planned decrease in coal usage may involve significant upfront investments and technology adoption risks, which could negatively affect net margins if operational savings or revenue growth do not materialize as expected.
  
• High reliance on infrastructure projects, such as the LTMS Power Integration Project and investments in the ASEAN Power Grid, might face regulatory, political, or financial hurdles that could delay benefits or increase costs, impacting earnings projections.
  
• The volatility in fuel margins and foreign exchange rates, as discussed, poses a risk to maintaining stable cash flow and could affect the company's ability to manage liabilities and future operational expenditures efficiently.
  
• The ambitious growth in the generation capacity through international projects, like those in the UK and Australia, could face geopolitical and market-specific risks that might affect the expected returns and thus impact overall profitability.

Valuation

• The analysts have a consensus price target of MYR 16.2 for Tenaga Nasional Berhad based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of MYR 20.6, and the most bearish reporting a price target of just MYR 12.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be MYR 62.9 billion, earnings will come to MYR 5.4 billion, and it would be trading on a PE ratio of 21.8x, assuming you use a discount rate of 8.0%.
• Given the current share price of MYR 14.94, the analyst's price target of MYR 16.2 is 7.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.