• The Star reported that there would be no hike in electricity tariffs for domestic or residential users in Peninsular Malaysia in 2H2022. The government will subsidise domestic users.

• However, industrial and commercial users will face a tariff surcharge of 3.7 sen/kWh in 2H2022. This is the same as 1H2022.  We view this development positively as it allays concerns that the ICPT (Imbalance Cost Pass Through) framework would not be honoured. There is a tariff surcharge as coal and gas costs have surged.

• In terms of earnings, there is no impact on Tenaga Nasional (TNB). Every quarter, the higher or lower fuel costs are recognised in the form of increased or decreased revenue in the P&L Statement.

• Under RP (Regulatory Period) 3 guidelines, the reference rates for fuel are US$79/tonne for coal and RM26/mmbtu for gas. RP3 is effective for the period of February 2022 to December 2024.

• There is a lagged cash flow impact as the tariff surcharge or rebate only takes place every 6 months. In 1QFY22, the under-recovery of TNB’s fuel costs amounted to RM3.5bil.

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

Source: AmInvest Research - 27 Jun 2022