Investment Highlights

• Maintain HOLD on Tenaga Nasional (TNB) with an unchanged DCF-based fair value of RM13.50/share (terminal growth rate: 2.0%, WACC: 7.9%).

• The government has approved the tariff surcharge for 2H2019 due to TNB’s higher fuel generation costs of RM1,592mil in 1H2019.

• TNB incurred an average coal price of US$99.235/tonne in 1HFY19, which was higher than the reference price of US$75/tonne stipulated under the RP2 (Regulatory Period) Framework.

• About RM443.7mil of the generation costs would be subsidised via the Electricity Industry Fund (RM107mil) and TNB’s return of excess revenue (RM336.7mil). The excess revenue came about as it was above the price and revenue caps stipulated under RP2 guidelines.

• The balance RM1,148mil of fuel costs would be recovered via the tariff surcharge of 2.55 sen/kWh for non-residential customers in 2H2019. This is the same as 1H2019. There is no tariff surcharge for residential customers.

• There is no impact on TNB. Every quarter, TNB records an under or recovery of fuel costs in its P&L statement. The tariff surcharge is essentially a recoup of the cash for the fuel costs already incurred and recognised in the P&L statement.

• There is potential for a tariff rebate in 1H2020 as fuel costs have declined. Since the start of the year, the price of coal has declined by 34.1% to US$67.25/tonne currently. This is below the reference price of US$75/tonne stipulated under the RP2 Framework. LNG price (Japan prices) has slid by 47.2% from the start of the year to US$4.75/mmbtu currently.

Source: AmInvest Research - 1 Jul 2019