News/ Comments

Government announced that effective 1 Jan 2014, average electricity tariff in Peninsular will increase from 33.54 sen/kWh to 38.53 sen/kWh (+14.89%), taking into account:

1) 1.52% or 0.51 sen/kWh for domestic gas price adjustment from RM13.70/MMBtu to RM15.20/MMBtu;

2) 10.17% or 3.41 sen/kWh for imported LNG price fixed at RM41.68/MMBtu;

3) 0.51% or 0.17 sen/kWh for coal price adjustment from US$85/mt to US$87.5/mt.

4) 2.69% or 0.90 sen/kWh on base tariff (TNB), which will be regulated through IBR (Incentive Based Regulation) mechanism.

Estimated 70.7% domestic users will not be affected by the new proposed tariff structures, while the remaining 29.3% may experience up to 25% increase in total electricity bill (See Figure #2). Commercial and industrial users are expected to experience an average electricity bill increase of 16.85% (ranging 0.9% to 18%), while Special Industrial Tariff (SIT) users experienced an average increase of 19%.

On the other hand, electricity tariff in Sabah and Labuan is expected to increase from 29.52 sen/kWh to 34.52 sen/kWh (+16.9%), with 62% of population not affected.

FIT (Feed-in-Tariff) scheme will also be revised up from current 1% to 1.6% (remain exempted for domestic users with <300 kWh monthly usage), which will be channeled to RE (Renewable Energy) Fund, and subsequently utilized for promotion and development of RE projects and initiatives.

Pros/Cons

The tariff hikes showed government’s commitment to reform the power industry (implementation of FCPT and IBR), benefitting TNB with earnings and cash flow certainty.

We are positively surprised with the base tariff hikes of 0.90 sen/kWh, which will improve TNB’s earnings. However, we expect TNB to expense-out small part of the revenue.

With the FCPT of imported LNG, TNB will not be burdened by the higher LNG cost going forward (currently shared equally by 3 parties: TNB, Petronas and Government).

Risks

1) Disruption in gas supply; 2) Delay in tariff revision; and 3) Indonesia implement tax on coal export.

Forecasts

Increased FY08/14-16 earnings by 8-12%, after accounting for base tariff hikes (+2.69%), fuel cost pass through tariff hikes (+12.2%) for LNG import, gas price hike and coal cost.

Rating

BUY

Positives –

• Implementation of automatic FCPT mechanism which eliminates uncertainties about future earnings.
• Earnings neutral from the higher LNG charges.

Negatives –

• Utilization of coal-fired power plants have reach limit.
• Decision on tariff revisions depends on the government.

Valuation

Increased target price to RM11.90 (Previous RM10.35) based on DCFE with Cost of Equity at 11.5%.

Source: Hong Leong Investment Bank Research - 3 Dec 2013