Tenaga Nasional Berhad Underperforms Industry Despite Increased Capital Investment

Tenaga Nasional Berhad, Malaysia's leading electric utility company, has seen a significant 31% increase in capital employed over the past five years. However, the company's return on capital employed (ROCE) has remained stagnant at 4.3%, falling short of the industry average of 6.1%.

The company's increased capital investment has not translated into higher returns, suggesting that the funds are not being allocated to high-return investments. As a result, Tenaga Nasional Berhad's stock has only gained 28% over the last five years, potentially reflecting investors' concerns about the company's underperformance.

Despite the lackluster returns, Tenaga Nasional Berhad is expected to benefit from the estimated MYR35 billion grid upgrades as part of Malaysia's energy transition roadmap. CGS-CIMB, a financial services provider, has raised Tenaga's target price to MYR15.60 from MYR12.00 and maintains its 'add' rating on the stock, which is currently trading at MYR11.34. The government's progress on the energy transition initiatives has been commendable, and more momentum is expected in the second half of 2024.

Why this matters: Tenaga Nasional Berhad's performance and Malaysia's energy transition plans have significant implications for the country's economy and the region's energy landscape. The company's ability to effectively deploy capital and improve its returns will be crucial for its long-term growth and competitiveness in the evolving energy sector.

In the latest financial results, Tenaga Nasional Berhad's revenue exceeded analyst estimates by 11%, but its earnings per share (EPS) missed estimates by 27%. The largest revenue segment was Non-Regulated Utility, contributing RM63.7 billion, with cost of sales amounting to 66% of total revenue. The company's largest operating expense was Depreciation & Amortisation (D&A) costs, at RM11.3 billion, accounting for 59% of total expenses.

Looking ahead, analysts expect Tenaga Nasional Berhad's revenue to decline by 1.0% per annum on average during the next 3 years, while the industry in Asia is expected to grow by 3.7%. Despite the company's shares increasing by 3.0% in the past week, investors should be aware of some warning signs regarding its future performance.

Key Takeaways

• Tenaga Nasional Berhad's capital employed increased 31% in 5 years, but ROCE stagnant at 4.3%.
• Funds not allocated to high-return investments, leading to 28% stock gain in 5 years.
• Expected to benefit from MYR35B grid upgrades, with target price raised to MYR15.60.
• Revenue exceeded estimates by 11%, but EPS missed by 27% in latest results.
• Analysts expect revenue to decline 1% annually, while industry in Asia grows 3.7%.