KUALA LUMPUR (June 26): Tenaga Nasional Bhd (TNB) receivables from imbalance cost pass-through (ICPT) are set to trend lower as the government continues to uphold the mechanism and make consistent payment to the utility giant, said analysts.

“As the government is committed to subsidise RM5.2 billion in the second half of 2023 (2H2023), we estimate that the remainder will be collected from the surcharges imposed,” said RHB Research analyst Sean Lim.

Last Friday (June 23), the government announced a higher electricity tariff on high-consumption households with a monthly bill of over RM708 but lower industrial tariffs as fuel costs decline.

“Note that TNB has received RM9.13 billion out of a total RM10.4 billion ICPT cost recovery from the government. This demonstrates the government’s commitment to upholding the incentive-based regulation (IBR) framework and ICPT mechanisms. As such, we expect ICPT receivables to be lower on the back of the lower ICPT charge,” Lim added.

Last year, TNB’s receivables under the ICPT mechanism ballooned to RM16.85 billion from just RM4.78 billion in 2021, following a lagging tariff revision and a delay in payment from the government then, which led to cash flow constraints for the utility group.

In its note on Monday (June 26), the RHB Research analyst upgraded TNB to “buy” from “neutral”, premised on the limited regulatory risk, which is expected to relieve working capital pressure amid moderating coal prices. Lim, however, maintains a target price of RM10.40.

CGS-CIMB analyst Dharmini Thuraisingam is forecasting a steep jump in TNB’s free cash flows from 2023 onwards, arising from normalisation in receivables, with potential for higher dividend payouts as demanding working capital requirements recede potentially serving as a strong share price catalyst.

“Despite the generally lower tariffs, the subsidy is much lower than the RM10.8 billion in 1H2023, mainly due to lower fuel prices.

“While the tariff revisions above have a neutral impact on group earnings, the more than halving of subsidy receivables should relieve pressure on Tenaga’s cash flows from demanding working capital requirements,” she explained.

Dharmini keeps an “add” rating on TNB and maintains a target price of RM12, making the group her top pick in the sector.

Hong Leong Investment Bank’s analyst Daniel Wong also said he is optimistic about the government’s ongoing tariff restructuring efforts and continuation of the ICPT mechanism.

“We expect TNB’s balance sheet to continue to improve in coming quarters given the drop in energy prices and ongoing payments by the government,” said Wong, who maintains a “Buy” rating and RM12 target price.

Meanwhile, Maybank Investment Bank analyst Tan Chi Wei said the new surcharge on large consumption household users reflects further progress on the government’s implementation of targeted subsidies, which signals reduced resistance to future tariff surcharges.

“A surcharge is now implemented on large household [consumption] users, signalling further progress on targeted subsidies. With falling coal prices, ICPT concerns should dissipate,” said Tan, who kept a “hold” rating and RM10 target price on TNB.

Shares of TNB were trading one sen or 0.1% lower at RM9.19 at 10.43am, giving it a market capitalisation of RM53.18 billion.

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