• Tenaga Nasional (TNB) announced that the Malaysian government has decided to continue with the current parameters of the RP2 extension and electricity tariff structure from 1 January 2022 until further notice.

• The government has also decided to maintain the ICPT rebate of 2.00 sen/kWh, which is currently being implemented for all customers from 1 January 2022 onwards, until further notice.

• TNB said the impact of the above ICPT rebate is neutral.

• We are puzzled over the tariff rebate and its neutral impact on TNB. For the ICPT rebate to have a neutral impact, we think that there may have been subsidies or grants from the government. We would be checking with TNB’s management on this.

• We think that instead of a tariff rebate, there should have been a tariff surcharge in 1H2022. This is because TNB had recognised the under-recovery of fuel costs of RM1.3bil in 3QFY21. Also, energy prices have exceeded the reference rates stipulated under RP2 Extension.

• Under the RP2 extension, the reference rates are US$67.45/tonne for coal and RM27.20/mmbtu for gas. According to Bloomberg as at 31 December 2021, coal price (Indonesia prices) was US$159.79/tonne while gas (Japan contract-based spot LNG import price) was US$6.60/mmbtu.

• Recall that under the ICPT mechanism, TNB would recognise the under or over recovery of fuel costs every quarter. However, the tariff rebate or surcharge only kicks in every six months. Hence, there is a lagged cash flow impact.

• On a positive note, the continuation of the parameters under the RP2 extension means that TNB’s rate of return of 7.3% would still be protected.

• We maintain BUY on TNB with a fair value of RM12.00/share.

Source: AmInvest Research - 3 Jan 2022