PM Dato’ Sri Anwar Ibrahim has indicated a potential electricity tariff restructuring, where higher tariff rate for MNCs and profitable “giant” companies, but unchanged for domestic users, SMEs, agriculture and food product sectors in 1H23. We are overall positive on the news, signifying government’s willingness to restructure the subsidies, ensuring long term sustainability of the power sector and lowering government’s high commitments on the subsidies. The news also indicate the new government’s commitment towards ICPT framework, protecting Tenaga’s earnings from fuel energy cost volatility. Maintain BUY on Tenaga with unchanged TP of RM11.65 based on DCFE valuation.

NEWSBREAK

Tariff restructuring. New Prime Minister Dato’ Seri Anwar Ibrahim has indicated a potential increase in electricity tariff on the horizon for multinational companies (MNCs) that export and no subsidy for selected profitable “giant” companies. However, government will not raise the blanket electricity tariff as it will burden the Malaysian public. Thus, there be no change to domestic users, SMEs, agriculture and food product sectors. Recently Tenaga has guided ICPT of RM16.4bn for 1H23 (vs. RM7bn in 2H22, which government subsidized RM5.8bn and remaining RM1.2bn through surcharge of +3.7 sen/kWh to non-domestic users). Effective average tariff for non-domestic was maintained at 43.65 sen/kWh and domestic will be 37.95 sen/kWh (see Figure #1).

HLIB’s VIEW  

Positive. Despite being neutral impact to Tenaga, we believe the measure will be viewed positively towards TNB and power sector:  

1) government’s subsidies restructuring to ensure long term sustainability of the sector;  

2) new government remains committed towards ICPT framework, thus allaying investor concern on regulatory risks;  

3) government passing some of the higher burden of subsidies to MNCs and profitable “giant” companies, lowering the potential high subsidies commitment, which affected investors' sentiment on potential receivables risk to Tenaga.  

Tenaga has recently updated government has fully paid the RM5.8bn subsidies in 2H22, again the payments proved government’s commitment towards ICPT framework. Based on the RM16.4bn ICPT in 1H23, we estimate surcharge of c.27.7 sen/kWh, which we expect to burden everyone and poise risk to inflation and economic recovery if the new government decides not to subsidize the amount. Hence, we believe the new government is implementing a balanced approach to protect the needed end user group while supporting economic recovery.

Maintain BUY, TP: RM11.65. We maintain BUY on Tenaga with unchanged DCFE - derived TP: RM11.65, given stable earnings and dividend payout. Tenaga’s earnings are expected to remain stable in FY23. We are positive with Tenaga’s long term commitment into the ESG growth path, while ensuring returns to shareholders.

Source: Hong Leong Investment Bank Research - 15 Dec 2022