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On Friday, JPMorgan reiterated its Overweight rating and MYR16.50 price target on Tenaga Nasional Bhd (TNB:MK), following the company's announcement of the terms for Regulatory Period 4 (RP4), which is set to span from 2025 to 2027.
The terms revealed an allowed capital expenditure (capex) of RM42.8 billion, which is more than double the capex for Regulatory Period 3 (RP3). Additionally, the allowed return remains steady at 7.3%, while the base tariff has been reset higher to 45.62 sen/kWh, marking a 14% increase from RP3.
The analysts pointed out that the outcomes for Tenaga Nasional now hinge on the contingent capex spending, which constitutes approximately 38% of the total allowed capex. The substantial capex allocation is expected to cover both the base case scenario of around RM11 billion annual capex and the market expectations, which are estimated to be between RM10 billion to RM12 billion.
Furthermore, there is potential for earnings upside if the contingency spending exceeds expectations, with an estimated 3-4% earnings upside for every additional RM1 billion spent annually.
Tenaga Nasional's stock performance has been strong, outpacing the KLCI Index by about 30% year-to-date, driven by investor optimism over a favorable RP4 outcome. JPMorgan anticipates a positive reaction in the share price following the announcement of these terms.
Looking beyond RP4, the firm notes that the key factors for Tenaga's continued outperformance will be the recovery of its Genco business and the growth in electricity demand. The firm's stance remains to Stay Overweight on Tenaga Nasional Bhd shares.
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