• A tariff surcharge for Jan-Jun 2019 has been granted to recover RM1.26bn of the total RM1.82bn under recovery over the Jul-Dec 2018 period due to higher generation cost.
• Of RM1.82bn, RM564m would be provided by Tenaga from excess RAB returns in 2018; the current RIG, published in 2012, would have transferred this savings in subsequent RP (ie. RP3).
• The 1H19 tariff surcharge for non-Domestic would be imposed in stages; Jan-Feb @ 1.35sen/kWh and Mar-Jul @ 2.55sen/kWh.
• We cut 2018F earnings by 7% to reflect the provision incurred while our 2019F/2020F are largely unchanged pending publication of the revised RIG by end 2018; expect downside bias to forecasts.
• Despite changes to the RIG, we still view Tenaga as a preferred defensive stock. Reiterate HOLD with a lower DCF-derived TP of RM15.40 (from RM15.50). Accumulate on dips.

The surcharge explained

Tenaga was granted a tariff surcharge for the Jan-Jun 2019 period for additional generation costs (ie. under recovery) incurred over Jul-Dec 2018 period, worth RM1.82bn. Based on supplementary information by Tenaga, the amount would be partly offset by excess RAB returns in 2018 (ie. RM564m); expect provision in Tenaga’s 4Q18 results.

New elements to ICPT calculation in revised RIG

The revised RIG (Regulated Implementation Guideline) for RP2 (to be published by end 2018) requires excess returns on the Regulated Asset Base (RAB) to be included in the ICPT. In the current RIG, published in Jan 2012, ICPT only reflects generation costs. Excess returns on RAB or cost savings are only returned to end users in subsequent RP (ie. RP3) as part of the calculation to determine revenue requirement and base tariff (Chart 1). We believe changes in the revised RIG is biased towards end users in order to mitigate shocks. 1H19 tariff surcharge would be imposed in stages; current 1.35 sen/kWh tariff surcharge would remain until end Feb before it is raised to 2.55 sen/kwh until end Jun 2019.

Adjustment to 2018F for now

We cut 2018F by 7% to reflect the RM564m impact in 4Q18 (Table 2). Our 2019F and 2020F estimates are kept largely unchanged pending publication of the revised RIG; expect downside bias to our estimates.

Maintain HOLD with a lower TP of RM15.40

We reiterate our HOLD call on Tenaga with a lower DCF-derived TP of RM15.40 (from RM15.50). Assuming the same earnings reduction for 2019F/2020F, our TP would be reduced to RM15.05. Notwithstanding, we remain proponents of the stock owing to its defensive properties. Accumulate on dips.

Source: BIMB Securities Research - 17 Dec 2018