EC has approved RM16.2bn ICPT in 1H23. Government will subsidize RM10.76bn and the remaining RM5.44bn passed through to non-domestic users. In summary, there will be no change to existing tariff rates except for non-domestic users (excluding micro-biz, SME and farming sector) for a significantly higher surcharge of +20 sen/kWh (from +3.7 sen/kWh). We are positive on this development it verifies that ICPT mechanism is being honoured in a more sustainable manner – some of it being passed on to end-users, rather than continued unsustainable subsidies by the government. Maintain BUY on Tenaga with unchanged TP of RM11.65 based on DCFE valuation.

NEWSBREAK

Tariff restructuring. The Energy Commission (EC) has approved ICPT of RM16.2bn (equivalent to a surcharge of +27.0 sen/kWh) in 1H23 due to the higher fuel energy costs (vs. benchmark) incurred in 2H22. The government has decided to subsidize RM10.76bn and the remaining RM5.44bn will be passed through to non-domestic users via a surcharge in 1H23. Unlike previously, the approved new tariff structure is based on a more targeted approach:

1) Domestic Users – Unchanged With Rebate of 2 Sen/kWh

2) Low Voltage Micro-biz, SME – Unchanged With Surcharge of 3.7 Sen/kWh.

3) Farming sector users – unchanged with surcharge of 3.7 sen/kWh.4) All other non-domestic users – surcharge of 20.0 sen/kWh (from 3.7 sen/kWh).

HLIB’s VIEW

Positive…on the continuation of the ICPT mechanism, which should allay investor’s concerns on regulatory risks. The recovery of RM16.2bn in 1H23 will improve Tenaga’s balance sheet with an expected drop in receivables (RM22.3bn in 3QFY22) and working capital financing. We are not overly concerned on Tenaga recovering the RM10.76bn subsidies from government (apart from cash flow timing risk) as we have seen government’s strong commitment towards the ICPT mechanism since its implementation in 2014 and the early payment of RM5.8bn subsidies in 2H22.

Maintain BUY, TP: RM11.65. We maintain BUY on Tenaga with unchanged DCFE-derived TP: RM11.65, given stable earnings and dividend payout. The new tariff structure should be seen in positive light as it honours the ICPT mechanism in a more sustainable manner.

Source: Hong Leong Investment Bank Research - 19 Dec 2022