Concerns prevail… Although TENAGA is anticipated to record stronger earnings in 2H22, riding along with the recovery of national power demand (forecast: +1.7%), the combination of the government’s tight financial position and buoyant fuel prices (coal and oil) could still trigger a concern over its tight cash flows position. To recap, the fluctuation in fuel prices are neutral to TENAGA’s earnings under the implementation of ICPT as it allows TENAGA to pass on the additional costs to the end users (subject to government approval, and the government will subsidise the difference if it is rejected) when the cost of fuels surpassed the baseline fuel costs, vice-versa. Nevertheless, the skyrocketing global fuel prices and the time lag effect have triggered a spike to TENAGA’s account receivables to RM19.3bn (vs. RM14.2bn in 1QFY22; RM10.7bn in 4QFY21), raising concern over TENAGA’s balance sheet and its ability to pay dividends in the near term, reflected by 6.05% YTD decline in TENAGA’s share price.  

…but likely priced in. Despite TENAGA’s near term cash flow concern amid ongoing mismatch from fuel cost pass-through, we believe the government will continue to honour the RP3-ICPT mechanism. Furthermore, the 15.2% plunge from the 52-week high of RM9.20 to RM8.42 yesterday would have grossly factored in the near-term headwinds, judging from the undemanding FY23 P/E of 9.1x (implying a -9.9% discount or -2SD against 5-year average of 10.1x). The lower dividend pay-out outlook is also baked into analysts’ forecast, with consensus DPS revised downward from initial 56sen (2022) and 60sen (2023) to 40sen and 43sen.

An apolitical play for the upcoming GE. Whether TENAGA will be given the green light to raise the domestic electricity tariff, we think it may only happen after the GE15. If such a move pans out, TENAGA will be the prime beneficiary as it (i) alleviates concerns that the government may eventually pass them the “subsidy burden” and (ii) reinforces that the ICPT mechanism is being honoured. Hence, rather than speculating “politically linked stocks”, we instead favour apolitical election plays like TENAGA.

Double bottom? Technically, TENAGA is pending for a double bottom breakout. A successful breakout above the RM8.60 neckline will indicate a downtrend reversal and spur the price toward RM8.80-9.05-9.32 levels. Cut loss at RM7.94.

Source: Hong Leong Investment Bank Research - 2 Nov 2022