Energy Commission (EC) has announced the continuation of ICPT mechanism effective 1 Feb 2022 – 30 Jun 2022 and implementation of IBR RP3 effective 1 Feb 2022 – Dec 2024. The ICPT was to cover the RM1.67bn excess fuel energy cost incurred in 2H21. Tenaga will recover the cost through surcharges of +3.70 sen/kWh to non-Domestic users and KWIE (to cover the +3.70 sen/kWh surcharges and maintaining 2.00 sen/kWh rebates to Dome stic users). However, there were no details made available yet on RP3. Nevertheless, w e are positive on the announcement, allaying investor concern on regulatory risk. Maintain BUY on Tenaga with unchanged TP of RM13.60 based on DCFE valuation.

NEWSBREAK

ICPT. Energy Commission (EC) has announced the continuation of the ICPT (Imbalance-Cost-Past-Through) mechanism effective for Feb 2022 – Jun 2022 period. Tenaga is allowed to implement surcharges of +3.70 sen/kWh in order to cover the excess RM1.67bn fuel energy cost incurred during 2H21, as global energy prices surged during the period. However, government will provide subsidies to domestic users of -5.70 sen/kWh (total cost of RM715m, covered by KWIE), effectively maintaining the effective average tariff at 37.45 sen/kWh for the segment. Non Domestic users will suffer +15.2% increase in average tariff to 43.15 sen/kWh.

IBR. EC also announced the effective implementation of RP3 for Feb 2022 – Dec 2024 period. The base tariff 39.45sen/kWh and the electricity tariff schedule are to be maintained during this period. However, there was limited detail of RP3 being made available. We expect most of the perimeters under RP3 to be somewhat similar to RP2, while the allowable return likely to have been reduced again from the current 7.3% under RP2 (vs. 7.5% under RP1).

HLIB’s VIEW

Neutral impact to Tenaga. We are positive with the continuation of ICPT and implementation of RP3, thus allaying investor concern on regulatory risks. Government seems to remain committed in the IBR framework (implemented since 2014), ensuring fair return to Tenaga and removing the risk of fluctuating global energy fuel costs from affecting Tenaga profitability and cashflow.

Maintain BUY, TP: RM13.60. We maintain BUY on Tenaga with unchanged DCFE derived TP: RM13.60, given stable cash-flow and dividend payout. Tenaga’s earnings are expected to remain stable in 4QFY21. We are positive with Tenaga’s long term commitment into ESG growth path, while ensuring returns to shareholders.

Source: Hong Leong Investment Bank Research - 31 Jan 2022