Tenaga reported a relative good set of numbers. Core net-profit of RM2,031m came in within our expectation, but surprised consensus on the upside, as it constituted 26% and 28% of our and street’s 2018E forecast respectively. Although it’s associate and JV recorded losses during the quarter, a lower effective tax rate helped mitigate this. We make no change to our EPS or TP, while maintaining our BUY call.

The Focus in on IBR and ICPT

While the results are broadly within expectations, the focus of the analyst briefing was on the Incentive Base Regulation (IBR) and whether the new government would maintain the current Imbalance Cost Pass Through (ICPT) mechanism while setting the electricity tariff moving forward. Management believes that the current system is transparent, and should be maintained, allowing Tenaga to be earnings neutral regardless of the fluctuation in fuel prices. The current WACC of 7.3% for the RP2 will only expire in 2020.

The Under-recovery Is Fully Covered by KWIP

Due to the higher coal price during the quarter, Tenaga will be receiving around RM634m from the Kumpulan Wang Industri Elektrik or KWIP (previously known as stabilisation fund) to maintain earnings neutral. Management believes that the current balance in KWIP is sufficient to cover the cost for 1H18. Certainly the government could still raise funds through other means to increase KWIP’s fund size, and maintain the current tariff till year end. The government will have to make a decision on the tariff by end of June based on the current ICPT mechanism.

Maintain BUY With Unchanged TP of RM18.70

We are maintaining our BUY call on the stock, with an unchanged DCFbased TP of RM18.70, as we believe that under the ICPT mechanism, the increase in fuel costs will continue to be earnings neutral to TNB, supporting the current pay-out. The recent change in the government has created uncertainty on the IBR, but we believe that since there is no mention about abolishing the current system in the new government manifesto, it is very likely for the current IBR structure to stay.

Source: Affin Hwang Research - 28 May 2018