News

Yesterday, the Ministry of Energy, Green Technology and Water announced that the tariff rebate to continue in Jan- Jun 2016 in the Dec Review window, at a lower rate of 1.52 sen/kWh for Peninsular Malaysia from 2.25 sen/kWh previously.

Comments

The 1.52 sen/kWh tariff rebate is based on fuel cost savings of RM762.0m for Jul-Dec 2015 under the Imbalance Cost Pass-Through (ICPT) mechanism. The reduced tariff rebate is expected given the higher gas/LNG consumptions in 2H 2015 on the outages of coal fired plant coupled with the recovery of coal prices.

In addition, the price for subsidised piped gas will be raised by RM1.50/mmbtu to RM18.20/mmbtu for Jan-Jun 2016 from RM16.70/mmbtu in Jul-Dec 2015. At the same time, the base tariff of 38.53 sen/kWh to remain unchanged. Note that this is in line with the mechanism whereby subsidised piped gas price will increase RM1.50/mmbtu every six months while the 38.53 sen/kWh base tariff to maintain till end 2017.

This latest tariff review is earnings neutral to TENAGA given the fuel cost risk is now being transferred to end users.

Outlook

Operationally, we expect the over-recovery trend to continue into the near-term judging from the current fuel prices. In addition, with a few coal-fired plants back in action from their outages in 3Q15 coupled with the Janamanjung Unit 4 Plant already commenced on 14 April 2015, coal generation mix should likely increase in the future, which should help to bring down fuel cost further. We remain positive on the ICPT mechanism, which ensure earnings certainty as the fuel cost risk is fully pass-through on a six-month laggard basis. Thus, future earnings will depend mainly on its operational efficiency.

Forecast

No changes to FY16-FY17 estimates.

Rating

Maintain OUTPERFORM

Valuation

Retain price target of RM15.42/share, based on 15.3x PER CY16, which is pegged to a +1.5SD of 2-year moving average of 12.5x.

Although the RM2.06b reinvestment allowance dispute with Inland Revenue could put its share price under pressure, it will be a one-off event even if it loses the appeal, thus have immaterial impact to its earnings prospects.

Risks to Our Call

A slowdown in economic growth which will generally affect electricity demand.

Source: Kenanga Research - 9 Dec 2015