We believe Tenaga and YTLP will not be affected by the recent change of government and ongoing policy review exercises. We maintain BUY on Tenaga with unchanged TP: RM17.50, on stable earnings and cashflow with new contribution from Jimah East (2019) and SIPP (2020). We also maintain BUY on YTLP with higher TP: RM1.45 (from RM1.25), on its limited earnings downside with upcoming new contribution from Attarat (2020) and Tg. Jati (2022).

Tenaga (BUY; TP:RM17.50)

Firmed up ICPT mechanism. The recent announcement of higher effective electricity tariffs under ICPT mechanism, has firmed up our view on the continuation of IBR/ICPT mechanisms. Given GST “zerorisation”, the net impact of electricity charges to end users vary between -3% to +2% (Figure #1). Nonetheless, Tenaga will remain neutral from the fluctuation of fuel prices (gas, LNG and coal) under cost past-through to end users under ICPT (in terms of rebates or surcharges), while electricity demand will remain healthy on the immaterial net change in electricity tariffs.

Sufficient KWIE fund. The KWIE fund balance was RM760m when the government announced RM114m tariff subsidy (domestic users only) for 2H18, indicating leftover of RM646m (or higher) by end-2018. Assuming coal prices to hover at USD100- 120/mt level and government to maintain the subsidy policy (domestic users only), government may disburse RM120-RM150m for every 6-month ICPT review and KWIE fund is sufficient to cover for another 4 ICPT reviews into end-2020.

Unaffected by IPPs cancellation/review. We believe the risk is minimal for Tenaga’s IPPs being part of the list being cancelled/ reviewed. Tenaga has already exerted due diligence evaluation when acquiring the 70% stake in Jimah East (2015) and 51% stake in SIPP (2017), indicating appropriate returns for these IPPs.

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 under 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.

YTLP (BUY; TP:RM1.45)

Limited earnings downside. Post disappointments in FY17, YTLP’s 9M18 core earning has rebounded due to commencement of Paka PPA extension and stable contribution from Wessex Water. We believe the drag from Seraya Power will subside with the insolvency of Tuaspring Power (Hyflux). We expect YES to gain from increasing subscriber base and lower traffic costs from regulated MSAP price reduction starting 2018. Earnings growth can be expected from the operation commencement of 45% owned Jordan Attarat Power (2020) and 80% owned Indonesia Tg Jati Power (2022).

Share Buy-Backs. YTLP has exercised substantial share-backs since Jun 2018 and today has accumulated 4.92% of total outstanding shares (2.8% prior to Jun). Moreover, major shareholders YTLC and YTL family have also been acquiring stakes in YTLP. We believe there is high chances that YTLP will distribute out treasury shares in FY19-20, as YTLP’s treasury shares surpass the level of 5% of total outstanding shares (Figure #2), as a reward for long term shareholders.

BUY, TP: RM1.45. We maintain BUY recommendation on YTLP with higher TP: RM1.45 (from RM1.25), as we assigned higher valuation for Seraya and YES, given their potential earnings recovery. Yield is also attractive at >5%.

Source: Hong Leong Investment Bank Research - 25 Jul 2018