News/ Comments

With the support of Government (GOM) and Energy Commission (EC), TNB is likely to push through the announced electricity tariff hike of average 14.89% effective 1 Jan 2014, despite the numerous requests to review the excessive hikes by various concerned/affected parties. GOM is viewing the hike imminent to address its budget.

The IBR (Incentive Based Regulation) implementation on 1 Jan 2014 is only on trial basis, which will be reviewed by EC. The effective implementation period will be 1 Jan 2015 to 31 Dec 2017 (to be reviewed for every 3 years period).

The base tariff hike of +2.69% is to compensate TNB’s projected operational and capital expenditure until 31 Dec 2017, inclusive of inflation adjustments. With the base tariff hikes, TNB is expected to generate net profit margin of 7.5% (similar to its calculatedWACC) for Power Transmission and Distribution segments during the regulated period.

Power Generation segment is not accounted under IBR implementation, given that power generation (IPPs) is regulated under competitive bidding structure. We suspect that the IRR of the new generation IPPs to be around 8-9%, as compared to 1st generations’ of up to 20%.

On the other hand, the tariff adjustments related to fuel cost (domestic gas price, imported LNG price and coal price), will be reviewed for every 6 months period. Should the actual fuel cost lower than assumed, the cost savings would be reflected in the following 6 months regulated tariff review period to ‘pass back’ to consumers and vice versa.

The imported LNG price is based on FOB Bintulu price, while domestic gas price is expected to increase for every 6 months (subject to GOM approval). On the other hand coal price is set based on projected market price based on current exchange rate of RM3.14/US$1.

The savings from the reduced capacity payment with 1st generation IPPs is currently being set aside and managed separately by TNB. EC has yet to determine its usage.

Currently there is still no clear policy on fuel supply shortage. The panelists suggested that 1) the higher cost sharing by GOM, TNB and Petronas; 2) the establishment of adjustment funds; or even 3) pass-through to consumers.

Risks

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

Forecasts

Unchanged.

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

Reiterate BUY with unchanged target price to RM11.90 based on DCFE with Cost of Equity at 11.5%.

Source: Hong Leong Investment Bank Research - 23 Dec 2013