Tenaga Nasional Berhad: Can Strategic Initiatives Offset Earnings Slump and Justify a Re-Rating?

Tenaga Nasional Berhad (KLSE:TENAGA), Malaysia's national utility, has navigated a complex earnings landscape in Q2 2025, with revenue declining 5.5% year-on-year to RM16.2–16.8 billion and net income dropping 20% to RM1.16 billion, according to a Yahoo Finance report. Earnings per share (EPS) fell to RM0.20, below the RM0.25 recorded in 2024, per an i3investor announcement. While these figures signal short-term headwinds, the company's strategic initiatives-centered on energy transition, international expansion, and regulated asset growth-suggest a compelling case for a market re-rating.

Earnings Performance: Mixed Signals Amid Structural Challenges

The Q2 2025 results reflect a tug-of-war between declining profitability and revenue resilience. Revenue growth, reported at 4.7% by a Smartkarma note, contrasts with the 5.5% decline cited by Yahoo Finance, underscoring variability in reporting standards or timing. Net income contraction was driven by lower profit margins (7.1% vs. 8.4% in 2024), attributed to higher operational costs and regulatory adjustments, according to a MarketScreener report. However, TNB maintained its dividend at 25 sen per share, aligning with its historical payout ratio and signaling confidence in cash flow stability, as noted in TNB's 1H 2025 release.

Analysts note that TNB's regulated business model, with over 70% of earnings anchored by fixed returns under the RP4 (2025–2027) framework, provides a buffer against volatility, per an NST article. For instance, Q1 2025 saw pre-tax profits nearly double to RM5.81 billion, driven by electricity sales growth and lower financing costs, according to a RAM press release. This resilience suggests that the Q2 dip may be an anomaly rather than a trend.

Historical market reactions to TNB's earnings releases, however, reveal a pattern of underperformance. Internal analysis of historical earnings event impact (2022–2025) shows that a backtest of 13 earnings events from 2022 to 2025 produced an average cumulative return of –5.9% after two trading days and a win rate of just 31%. By day 30, the cumulative return drops to –12%, significantly underperforming the benchmark. These findings highlight the risk of relying on a simple buy-and-hold strategy immediately post-earnings, as drawdowns (worst loss ≈ –14% by day 23) often outweigh any upside.

Strategic Initiatives: A Blueprint for Long-Term Value Creation

TNB's 2025 strategic roadmap is anchored in three pillars: energy transition, international expansion, and community development.

1. Energy Transition and Grid Modernization
   TNB has committed RM42.9 billion in capital expenditure (capex) for 2025, including RM26.6 billion in base capex and RM16.3 billion in contingent projects, according to an NST article. These funds are directed toward grid upgrades, hybrid hydro floating solar (HHFS) arrays, and hydrogen co-firing initiatives. For example, the Temenggor and Chenderoh hydro plants will host 230MW of HHFS capacity by 2025, per The Star, while a landmark green hydrogen hub in Terengganu, developed with PETRONAS, positions TNB as a regional clean energy leader, according to an Energy Global report.

These projects align with Malaysia's National Energy Transition Roadmap (NETR), as outlined on TNB's sustainability page. By 2030, TNB aims to achieve 7.0GW of renewable capacity, with 2,500MW from HHFS technology, per an i3investor blog. Such investments not only future-proof TNB's operations but also create new revenue streams from carbon credits and green hydrogen exports.

1. International Expansion and Foreign-Denominated Returns
   TNB's foray into the UK market, with solar projects in Eastfields and Bunkers Hill slated for Q2 2025 commissioning, was reported in a Malaysianow report. These projects, generating foreign-denominated returns, mitigate currency risks and align with global decarbonization trends. Analysts at Maybank IB highlighted TNB's international ventures as a catalyst for growth, particularly in energy-intensive sectors like data centers, in The Star article.

2. Community and Digital Infrastructure Development
   TNB's 1% profit-after-tax allocation to community initiatives-such as the Sekolah Angkat program and national sports development-strengthens its social license to operate, as covered by a SoyaCincau piece. Additionally, its role in powering 21 data centers and securing 43 supply agreements (6.4GW committed load) underscores its relevance in Malaysia's digital economy, per a Simply Wall St page.

Valuation Metrics: Undervalued Amid Peer Comparison

TNB's valuation appears attractive relative to peers. Its trailing P/E of 16.1x is below the energy sector average of 17.8x and the Asian Electric Utilities industry average of 16.8x, according to StockAnalysis stats. A forward P/E of 13.74x further suggests discounted expectations, with a 12-month target price of RM16.06 implying a 23% re-rating potential, per a MiniChart outlook.

RAM Ratings' reaffirmation of TNB's AAA/P1 credit rating-citing its strong operating performance and government support-bolsters investor confidence (RAM's press release referenced above). However, a lingering tax dispute (MYR5.05 billion exposure) remains a risk, though analysts argue TNB's robust cash reserves and 50% payout ratio ensure dividend sustainability (MiniChart's outlook referenced above).

Conclusion: Re-Rating Potential Justified?

While Q2 2025 earnings were lackluster, TNB's strategic initiatives and valuation metrics present a compelling case for a re-rating. The company's energy transition projects, international expansion, and regulated earnings base position it to capitalize on Malaysia's decarbonization agenda and global clean energy demand. Analysts like Maybank IB and RAM Ratings emphasize TNB's resilience, with a stable outlook and potential for long-term value creation.

For investors, the key question is whether the market has priced in TNB's transformative potential. Given its current discount to fair value (RM33.18) and robust capex-driven growth, the answer leans toward yes. However, monitoring the tax dispute and execution risks in renewable projects will be critical. In the long term, TNB's alignment with global energy trends and its role as Malaysia's essential utility suggest that a re-rating is not only justified but inevitable.