We revise up our TP on Tenaga (TNB) to RM 18.00 (from RM16.50) and maintain our BUY call, as we roll forward our valuation horizon. We believe that our investment thesis on TNB is still intact, as the Chairman of the Energy Commission (EC) guided during a recent briefing that any costs arising from the Imbalance Cost Past Through (ICPT) mechanism will continue to be earnings neutral to TNB. Tenaga remains one of our top BUY ideas for Malaysia.

Confusion Over the RM930m Tariff Rebate

We believe that there is some confusion among investors on the tariff rebates for Jan-Jun 2018, as it was reported by the press that the cost of RM930m would be borne by TNB. This is despite the fact that any rebate should be earnings neutral to TNB under the ICPT mechanism. As pointed out by the EC, the rebates are funded by the shortfall of the actual and approved CAPEX and OPEX during the RP1 (2015-2017), which amounted to RM2.4bn. As such, we do not think there will be any impact to TNB earnings, as the cost will likely be capitalised as part of the regulated asset base under the Incentive-based Regulation (IRB) Mechanism.

Regulated Asset Base Return (WACC) Lowered to 7.3% From 7.5%

The new WACC rate is at 7.3% for RP2, which is lower than the 7.5% for RP1. Although we were expecting the WACC to remain at 7.5%, the impact to our forecast is minimal. The EC has also indicated that forecasted average profit for the regulated business in RP2 should be similar to RP1, supported by an average regulated asset base of RM57bn (prev RM42bn). The lower WACC was mainly due to the decline in the COD to 4.3% in RP2 from 6.24% in RP1. The higher effective base tariff at 39.45sen/kwh from 38.53sen/kwh is mainly due to the change in customer mix, as the base rate tariff for each segment remains unchanged for RP2.

Revised Up TP to RM18.00, and Maintain BUY Call

We have revised up our DCF-based TP to RM18.00, as we roll forward our valuation base to FY19E. We are still keeping our BUY call on the stock, as we believe that under the ICPT mechanism, the increase in fuel costs will be earnings neutral to TNB, supporting current dividend pay-out. TNB remains our country top pick. A major risk lies in any changes to the current ICPT mechanism.

Source: Affin Hwang Research - 17 Jan 2018