Tenaga Nasional's Q1 Earnings Meet Expectations; Buy Rating Maintained

Overview

This report is Nomura's quick take on Tenaga Nasional Berhad's (TNB) Q1 FY2026 results. It notes that both revenue and core net profit achieved YoY growth, with overall performance meeting institutional and market consensus expectations. Although tax expenses unexpectedly increased leading to QoQ profit decline, core fundamentals remain solid due to recovering power demand and lower fuel costs. Nomura maintains 'Buy' rating and RM16.80 target price, believing current valuation, while slightly above historical average, remains attractive with ~3.7% dividend yield.

Core views

Revenue & Profit: Q1 FY2026 revenue grew 2% YoY to RM16.4 billion (down 3% QoQ), mainly driven by 7.0% YoY increase in overall power demand in Peninsular Malaysia, with strong commercial sector performance. Core net profit (PATAMI) reached RM1.3 billion, up 6% YoY, primarily due to higher electricity sales and lower fuel prices. However, core profit fell 18% QoQ mainly because tax expenses surged to RM422.1 million (vs RM114 million last quarter), viewed as a negative surprise. Business Highlights & Mechanism Impact: The Automatic Fuel Adjustment (AFA)/Imbalanced Cost Pass Through (ICPT) mechanism showed RM861.7 million excess recovery, significantly higher than RM175.2 million in the same period last year, mainly due to declining fuel prices. Power generation outperformed expectations, with Q1 core net profit of RM322.3 million already reaching 73% of Nomura's full-year forecast for TNB's generation business, benefiting from improved plant performance. Valuation & Rating: Nomura reiterates 'Buy' rating for TNB with DCF-derived target price of RM16.80. Current share price implies 16.2x FY2026F P/E, slightly above its historical average of 13.9x, but with ~3.7% dividend yield, the stock remains attractive.

Analysis framework

Nomura employed typical utility company earnings analysis framework. First, revenue changes were analyzed through volume-price decomposition, attributing growth to demand (especially commercial sector) and cost pass-through effects under AFA/ICPT mechanism. Second, on profit side, focus was placed on fuel cost impact on gross margin improvement while noting tax expense volatility as short-term risk. Finally, combining segment performance (e.g., generation business) progress against full-year forecasts and using DCF model for absolute valuation, supplemented by P/E comparison against historical average, to derive final investment rating.

Methodology notes

• Valuation MethodDCF Discounted Cash Flow

  DCF Discounted Cash Flow Model

  Report uses discounted free cash flow method to calculate target price, assuming WACC of 6.4% and terminal growth rate of 0.5%, a common approach for stable cash flow companies like utilities.

• Industry Analysis FrameworkVolume-price decomposition

  Revenue Volume-Price Analysis

  Breaking down revenue changes into volume (7% power demand growth) and price/cost pass-through (AFA/ICPT mechanism) dimensions to clarify whether growth comes from market demand expansion or pricing adjustments.

• Company Fundamentals & Financial FrameworkOthers

  Regulatory Mechanism Impact Analysis (AFA/ICPT)

  Analyzing impact of Malaysia's unique Automatic Fuel Adjustment (AFA) and Imbalanced Cost Pass Through (ICPT) mechanisms on company's cash flow and profits, crucial for understanding local utility stock performance volatility.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Tenaga Nasional (TENA.KL)

  Direct coverage target, benefiting from power demand growth and lower fuel costs

  Strengths

  Generation business outperformed, AFA mechanism improves cash flow, ~3.7% dividend yield attractive

  Weaknesses

  Unexpected tax expense increase, current P/E (16.2x) above historical average (13.9x)

  Risks

  AFA mechanism suspension or adjustment, rising energy prices increasing receivables, carbon tax implementation

Key data

• Q1 FY2026 RevenueRM16.4 billionUp 2% YoY, down 3% QoQ
• Q1 FY2026 Core Net Profit (PATAMI)RM1.3 billionUp 6% YoY, down 18% QoQ
• AFA/ICPT Excess RecoveryRM861.7 millionRM175.2 million in same period last year, mainly due to lower fuel prices
• Generation Business Q1 Core ProfitRM322.3 million73% of Nomura's full-year forecast
• Target PriceRM16.80Based on DCF model, unchanged
• Current P/E (FY26F)16.2xAbove historical average of 13.9x
• Dividend Yield~3.7%Considered attractive

Impact & implications

The report believes that despite short-term tax expense impact, core operations remain solid, especially generation business strength supporting full-year performance. AFA mechanism's excess recovery improves cash flow. For investors, while current valuation multiples are slightly above historical average, stable dividend returns and clear earnings visibility maintain stock's appeal. Nomura expects company to clarify tax issues and provide updates on new business segments like data centers during May 26 briefing.

Risks

• Suspension or adjustment of Automatic Fuel Adjustment (AFA) mechanism
• Rising energy prices increasing receivables
• Upcoming carbon tax policy

What to watch

• Company's clarification on unexpectedly high tax rate during May 26 briefing
• Latest updates on data centers and other new business segments