• The Malaysia government has approved the Imbalance Cost Pass-Through (ICPT) mechanism for 2H2023.

• In 2H2023, an electricity surcharge of 10 sen per kWh will be imposed on domestic or residential users, who consume more than 1,500kWh per month. This is equivalent to an electricity bill of RM708. Previously, all domestic users enjoyed a rebate of 2 sen/kWh.

• For water and sewerage operators, the electricity surcharge will be lowered to 3.7 sen/kWh from 20 sen/kWh in 2H2023.

• For commercial and industrial users, the electricity surcharge will be reduced to 17 sen/kWh from 20 sen/kWh. We reckon that commercial and industrial users would be enjoying a 10% to 20% decline in electricity bills in 2H2023.

• The adjustments to electricity tariff in 2H2023 are neutral on Tenaga Nasional. Under the ICPT mechanism, increases in fuel costs are passed on to users every 6 months. In TNB’s books, the higher fuel costs are recognised in the P&L every 3 months. There is a delayed cash flow effect.

• Although fuel costs have declined, they are still higher than the reference rates stipulated in the RP3 (Regulated Period) guidelines. The reference rates under RP3, which is effective for the period of February 2022 to December 2024), are US$79/tonne for coal and RM26/mmbtu for gas.

• We maintain BUY on TNB with a fair value of RM11.80/share. TNB is currently trading at an attractive FY24F PE of 11x, which is lower than its 2-year average of 15x.

Source: AmInvest Research - 26 Jun 2023