Despite the high fuel energy costs and the outstanding ICPT, we remain positive on Tenaga’s earnings outlook. We believe government remains committed toward ICPT framework in instilling long term investors’ confidence and ensuring long term sustainability of the power sector. The short term cash flow mismatch will be addressed in upcoming ICPT review by year end, given the current stable fuel energy prices. We maintain our BUY recommendation on Tenaga with unchanged DCFE-derived TP of RM11.65.

High fuel energy prices. As at Nov-22, coal prices remained stubbornly high above USD300/mt (see Figure #1) since the spike from Mar-22, while the recent RM deterioration against USD to >4.70 has further exacerbated the situation. Similarly, gas price (charged by Petronas) continued its uptrend as it tracks international gas/LNG prices (see Figure #2). Despite European gas prices weakening recently to RM115/mmtbu (see Figure #3), it is still way above Japan imported LNG prices at RM88/mmbtu and Malaysia ex-LNG prices at RM43/mmbtu. As the Northern Hemisphere enters winter season, we anticipate the high fuel energy prices to remain till year end.

ICPT. Since implementation in 2015, the ICPT framework remains intact until now. Latest ICPT approval was RM7bn (RM5.8bn subsidized by government) for 2HFY22. Tenaga updated that it has received RM3.9bn of the approved RM5.8bn ICPT subsidy commitment from the government. We note there was a huge difference of RM9.4bn ICPT (recognised in Tenaga’s result for 1HFY22) combined with the outstanding RM2.4bn ICPT from 2HFY21, as compared to the approved RM7bn ICPT due to mismatch of timing recognition. ICPT calculations by Energy Commission only take into account of 2-months actual and 4-months estimated fuel energy costs (see Figure #4), which resulted under-estimation of actual fuel energy costs as fuel energy prices surged in month-3 (see Figure #5). Given fuel energy prices remained relatively stable for the period Jul-22 until today, we expect the gap between the estimated and actual fuel energy prices to narrow significantly for the upcoming 1HFY23 ICPT review by end-2022 and Tenaga will be able to recover the current outstanding c.RM4.8bn. Previously, the Energy and Natural Resources Minister has indicated a potential RM20bn for upcoming ICPT review. We believe the government remains committed toward ICPT implementation as part of its broader measure to instil long term investors’ confidence toward government’s policy and ensure long term sustainability of the power sector.

Cash flow. Due to mismatch of timing recognition, Tenaga’s receivables have ballooned to RM19.2bn (Jun-22), affected by the huge ICPT of RM12.1bn (inclusive of our estimated c.RM4.8bn under-estimation of ICPT). In additional to the c.RM4.8bn, the stubbornly high fuel energy prices (especially for coal) would require Tenaga to secure huge short-term working capital for the cash flow mismatch. Government has stepped in to provide a financing guarantee of up to RM6bn. Tenaga has assured that the cost for huge working capital requirement will be compensated under upcoming ICPT adjustments. It was also revealed (in the media) that the government was looking into ways to address the high energy cost issue, including through the provision of targeted (energy) subsidies in the future.

Forecast. Unchanged.

Maintain BUY, TP: RM11.65. We maintain BUY on Tenaga with unchanged DCFE derived TP of RM11.65 as earnings are expected to remain stable in FY22. We are not overly concerned on Tenaga’s short term cash flow mismatch and remain positive on Tenaga’s long term commitment into the ESG growth path, while ensuring return to shareholders.

Source: Hong Leong Investment Bank Research - 2 Nov 2022