Tenaga Nasional - A Higher Surcharge for 2H19

Date: 01/07/2019

Source  :  BIMB
Stock  :  TENAGA       Price Target  :  14.30      |      Price Call  :  HOLD
        Last Price  :  13.68      |      Upside/Downside  :  +0.62 (4.53%)

  • The tariff surcharge for Jul-Dec 2019 is raised to 2.55sen/kWh for a net recovery of RM1.15bn over 1H 2019 incurred from higher generation cost primarily due to increase in coal costs.
  • The 2H 2019 tariff surcharge is 0.4sen/kWh higher than hat granted for 1H 2019; as before it only applies to non-Domestic users; surcharge for Domestic users (ie. Residential) would be subsidized by the KWIE fund.
  • While there is some timing of cost adjustments pertaining to the Efficiency Carryover Scheme (ECS) under the IBR mechanism, the impact is minimal. No change to our estimates.
  • Its share price has recovered in recent weeks, prompting us to downgrade Tenaga to HOLD with an unchanged RM14.30 DCFderived TP. Fundamentals remain solid. Accumulate on dips.

A higher surcharge – all is fair

The regulator has approved another surcharge in 2H 2019 to recover excess generation costs incurred in 1H 2019. Interestingly, we note that surcharge of 2.55sen/kWh for 2H 2019 would be higher than in 1H19 which was at 2.15sen/kWh. In our view, this should further assuage any concerns over the government’s stance towards Tenaga vis-à-vis the revival of MyPower for the MESI 2.0 initiative which has been widely perceived to be disruptive to Tenaga’s existing business model.

Some details to the tariff surcharge

The surcharge is for recovery of RM1.59bn worth of excess generation costs incurred primarily due to higher coal prices. Of this amount, about RM443.7m would be offset (Table 1); Tenaga would ‘incur’ RM337m derived from the Revenue Adjustment while the remaining amount would go to subsidise Domestic users using the KWIE/EIF. The effective tariff surcharge in 1H19 was 2.15sen/kWh for non-Domestic users. To mitigate the impact, the surcharge collected from the Industrial and Commercial users were in 2 stages; Jan-Feb @1.35sen/kWh and MarJun @ 2.55sen/kWh.

Maintain estimates; IBR adjustments minimal

We expect minor earnings impact from timing of cost adjustments in regards to savings accumulated in RP1 to be transferred in RP2 under the ECS mechanism (Table 4). No changes to our estimates for now.

Downgrade to HOLD with RM14.30 TP

The recent share price recovery has been encouraging but the stock remains our favourite. Downgrade to HOLD with and unchanged DCFderived TP of RM14.30. Fundamentals remain solid while potential dividend payouts are generous. Accumulate on dips.

Source: BIMB Securities Research - 1 Jul 2019

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