• Tenaga received approval from the GoM via the EC to impose 1.35sen/kWh of tariff surcharge over Jul-Dec 2018 amidst higher generation cost incurred over Jan-Jun 2018 period.

• While the IBR Framework ensures neutral P&L impact to Tenaga, the development is viewed positively for the sector as it signifies the acknowledgement of ICPT mechanism by the new regime.

• For end users, tariff surcharge is only imposed on Commercial and Industrial segments while that of Domestic (ie. Residential) is subsidised by the KWIE fund, estimated c.RM155-166m.

• Maintain BUY with an unchanged DCF-derived TP of RM17. The partial subsidy structure which is akin to the Gas sector would surely extend the KWIE fund and assuage concerns on Tenaga.

The first tariff surcharge introduced

Tenaga announced that it has received approval from the Government of Malaysia (GoM) via the Energy Commission (EC) to impose tariff surcharge for the Jul-Dec 2018 period of 1.35sen/kWh. This accounts for the under-recovery of generation costs worth RM689.2m in 1H18. With every rebate/surcharge, the impact to Tenaga is neutral. Still, we view this positively as it indicates that the new government remains committed with reforms made to Malaysia Electricity Supply Industry (MESI) back in 2014/15 with introduction of the IBR Framework.

Partial subsidy structure

At end user, the surcharge (ie. which leads to higher bills) would only be effective for the Commercial and Industrial segments. Meanwhile, that incurred by Domestic (ie. Residential) users would be subsidised using funds from the Kumpulan Wang Industri Elektrik (KWIE). The fund is currently under purview of the Ministry (ie. formerly known as KETTHA).

Prudent KWIE disbursement

Based on Tenaga’s guidance, the amount fund in KWIE is c.RM1.5bn. On assumption that Domestic segment consumed 11,500-12,300GWh in 1H18 and at 1.35sen/kWh surcharge rate, we roughly estimate that the subsidy would cost KWIE c.RM155-166m. This leaves ample of funds for utilisation of future cost under-recovery.

Maintain BUY with unchanged TP of RM17

In the last 3 months, Tenaga’s share price has fallen as much as 8.6% possibly on concerns of the tariff surcharge. We believe the pullback makes an attractive opportunity for exposure into the stock. It trades at 11.5x FY18F PE and decent yield of 3.6% based on a conservative 30% dividend payout assumption.

Source: BIMB Securities Research - 2 Jul 2018