Investment Highlights

• The Energy Commission’s (EC) briefing on the parameters underlying the Regulatory Period 2 (RP2: 2018-2020) under the Incentive-Based Regulation (IBR) mechanism was attended by some 30 analysts. The EC was represented by Chairman Datuk Abdul Razak Majid.

• The briefing allays potential concerns on the funding source over Tenaga’s support programmes. Meanwhile, excess collection gained over the RP1 should buffer under-recovery of fuel cost in the interim. Maintain BUY with a DCF-based FV of RM17.82 (WACC: 7.7% terminal growth: 2.0%).

• The key takeaways from the briefing are:

i) The electricity base tariff rate of Regulatory Period 1 (RP1: 2015-2017) remains unchanged at 38.53 sen/kWh heading into RP2, as per Tenaga’s announcement on 26 Dec 2017.

ii) The EC revealed RP1’s base tariff rate resulted in an average selling price of 39.45 sen/kWh. This rate will be the reference price for RP2. The deviation was due to better customer mix (refer Exhibit 1).

iii) The RP2 regulatory return on Tenaga was revised to 7.3% from 7.5%. It falls within our earlier assumption of a revision within the 7.0%–7.5% range. Therefore, we leave our forecasts unchanged. The EC revealed the key change in parameters surrounding the regulated return was solely the lower cost of borrowing of 4.3% against 6.24% in RP1 (refer Exhibit 3).

iv) The EC revised the fuel coal price benchmark to US$75/MT from US$87.50/MT or RM315.90/MT (refer Exhibit 4). It assumes a USD/MYR exchange rate of 4.212 over the period of RP2, i.e., 2018-2020. When benchmark prices were determined, the market price of coal was RM376.58/MT or 19% higher than the newly determined benchmark price.

v) In the meantime, the under-recovery of fuel cost will amount to RM929mil for the period 1 Jan 2018—30 June 2018. It will be funded by excesses gained over the RP1 instead of the usual ICPT and PPA savings fund which has been exhausted. The balancing fund ensures Tenaga maintains earnings neutrality against volatile fuel prices.

vi) Tenaga’s consumer-centric initiatives involving infrastructure development and support programmes such as the RM1bil educational programme, 1.5mil smart meters and energy-efficient LED street lighting will be borne by neither the government nor Tenaga. It will be funded by excesses arising from the shortfall in actual capex and opex spending benchmarks.

Source: AmInvest Research - 17 Jan 2018