NEWSBREAK

The Energy Commission (EC) announced the continuation of ICPT (Imbalance-Cost Past-Through) for the period Jul-Dec 2018, where average base tariff remains unchanged at 39.45sen/kWh and Tenaga will pass-through RM698.19m (1.35sen/kWh) of higher than assumed fuel cost generation for the period Jan-Jun 2018.

Domestic customers. Domestic customers (above 300kWh/month) will be charged an average tariff of 39.45sen/kWh with the ICPT 1.35sen/kWh to be subsidized through KWIE (Kumpulan Wang Industri Electrik). The subsidy is estimated at c.RM100m, which can be easily absorbed by KWIE (est. RM600m by end 1H18). Hence, this category will experience an effective tariff of 39.45sen/kWh in 2H18.

Non-domestic customers. Non-domestic customers – i.e. commercial and industry users will be charged with an additional ICPT 1.35sen/kWh on top of the base tariff of 39.45sen/kWh, amounting to effective 40.80sen/kWh in 2H18.

HLIB’s VIEW

Unchanged policy. The announcement will allay investors’ concerns on the new government’s commitment in honouring the IBR and ICPT mechanisms. The implementation of both mechanisms seeks to ensure long term sustainability of the power industry with acceptable returns and re-investments for power suppliers in meeting the power demand with fair pricing for power users.

Neutral impact to Tenaga. The announcement is in line with our expectation. We are neutral on the ICPT implementation, as Tenaga will be able to recoup its higher fuel generation costs of RM698.19m incurred in 1H18 through compensation funding from KWIE (for domestic users) and higher tariff charges (for non-domestic consumers) in 2H18 under ICPT mechanism.

Forecast. Unchanged.

Maintain BUY, TP: RM17.50. We maintain BUY recommendation on Tenaga with unchanged DCFE-derived TP: RM17.50. Tenaga’s earnings and cash flow are expected to be stable with the implementation of the IBR/ICPT mechanisms. The lowered 7.3% of regulated assets under RP2 (2018-2020) will be offset by higher asset base, new contributions from associates and power plants.

Source: Hong Leong Investment Bank Research - 29 June 2018