Tenaga Nasional Bhd is facing a substantial tax liability of RM5.05 billion after the Federal Court ruled it is not entitled to claim the reinvestment allowance (RIA), a tax incentive designated for manufacturing entities. The court’s decision, which overturns previous rulings in favour of the utility company, aligns with the position taken by the Inland Revenue Board (IRB).
According to Tenaga’s 2024 annual report, the apex court determined that the company, as a utility provider, does not qualify as a manufacturer and should have pursued the investment tax allowance (ITA) under Schedule 7B of the Income Tax Act, rather than RIA under Schedule 7A. The case centred on a RM1.25 billion tax assessment for 2018.
Tenaga has indicated that it will now seek to claim ITA under the appropriate provision. However, the company cautioned that the ruling could have material implications for its financial performance and net assets in the 2025 financial year.
The tax dispute dates back to 2015, with the IRB having issued RM9.25 billion in additional tax assessments covering the financial years from 2013 to 2021. Following the waiver of RM2.44 billion in penalties through prior settlements, Tenaga’s potential outstanding liability was reduced to RM6.81 billion. A payment of RM1.76 billion was made in December 2020, leaving a remaining exposure of RM5.05 billion.
Despite the legal challenges, Tenaga continued to claim the RIA for the years 2022 and 2023 and had intended to do so for 2024, in accordance with prevailing tax legislation.
The court’s decision weighed heavily on investor sentiment. Tenaga’s share price declined by as much as 74 sen on Thursday, closing at RM14.02 — its lowest level since early June — and erasing more than RM3 billion in market capitalisation. Trading activity surged to more than four times the 20-day average.
Analysts have highlighted the potential risks of significant provisions and broader implications for other pending cases. Nevertheless, sentiment around the stock remains broadly favourable, with 19 “buy” recommendations, four “hold” ratings, and no “sell” calls, according to Bloomberg. Year-to-date, the stock is down approximately 6%, with a 12-month target price of RM16.28, implying a potential upside of 16%.
CIMB Securities noted that if Tenaga is required to fully absorb the RM5.05 billion tax charge, its target price could be revised downwards by 87 sen, or 5.5%. However, should Tenaga successfully claim ITA moving forward, the impact on core earnings could be mitigated. While the tax charge may offset the forecasted FY2025 net profit of RM3.78 billion, it is expected to be a non-recurring event.
Tenaga delivered strong results in FY2024, posting a 69.3% year-on-year increase in net profit to RM4.69 billion, the highest since FY2018. This performance was underpinned by foreign exchange gains and higher electricity sales. Annual revenue rose 6.9% to RM56.74 billion.
For the first quarter of FY2025, Tenaga reported a net profit of RM1.1 billion, representing a 48% increase compared to the same period last year, despite being partially impacted by elevated tax expenses. Quarterly revenue rose 17.6% year-on-year to RM16 billion.
As of the end of March, Tenaga reported RM16.8 billion in cash and RM7.05 billion in receivables, deposits and prepayments.
-The Edge
