• We maintain our forecasts, FV of RM17.46 based on DCF and BUY call.

• The government has given its green light to Tenaga to raise non-domestic tariff by 1.35sen/kWh for 2H18 to partially pass through some RM698.2mil under-recovery of fuel cost in 1H18.

• There is no change to domestic tariff as the additional 1.35sen/kWh “surcharge” will be funded by savings from the renegotiation of the first-generation PPAs held under Kumpulan Wang Industri Elektrik.

• While the latest development is neutral to Tenaga’s earnings (as Tenaga is entitled to pass on higher fuel cost to end-users under the Imbalance Cost Pass-Through (ICPT) mechanism, eventually), it does show that the government has the political will to raise electricity tariffs, at least for the non-domestic sector.

• The latest development will reduce the perceived regulatory risk and hence risk premium of Tenaga1.

Source: AmInvest Research - 29 Jun 2018