The base tariff for RP3, maintained at 39.45 sen/kWh, was announced last Friday. While a 2.0 sen/kWh tariff rebate is given to domestic customers, 3.7 sen/kWh tariff surcharge is imposed on non-domestic users to counter the rising coal costs. This is positive as to clear earlier market concern of TENAGA having to bear the extra cost. At 10x FY22E PER and >4% yield, TENAGA looks fairly attractive with the IBR in place. Maintain OP at TP of RM11.41.

Base tariff to be maintained at 39.45 sen/kWh for RP3. Last Friday, the Energy Commission (EC) had confirmed the implementation of RP3 from Feb 2022 to Dec 2024 with an unchanged base tariff of 39.45 sen/kWh. A rebate of 2.0 sen/kWh will be given to domestic customers but a 3.7 sen surcharge imposed to non-domestic users for the Feb to Jun 2022 period. Nonetheless, there is no further detail such as WACC, reference price of coal and gas, and demand growth factor. We believe these parameters are the same as RP2 which was at 7.3%, USD75/MT, RM27.2/mmbtu and 1.8%-2.0% respectively.

Tariff surcharge for non-domestic users… While EC disclosed that the 2 sen/kWh rebate for domestic users will be funded by KWIE amounting to RM715m, there is no details on the surcharge. We estimate that the 3.7 sen/kWh surcharge amounts to c.RM1.8b. The surcharge was not a surprise with coal price shooting through the roof, soaring to above USD200/MT currently from USD50-60/MT in 2020. TENAGA had reported average coal cost of USD61/MT in FY20. We welcome the surcharge as it clears earlier market concern about TENAGA not able to pass through the rising fuel cost to the end-users.

…as rising fuel cost is pass-through. Like any other commodities which experienced record high price owing to reopening pent-up demand, tight supply coupled with logistic constraint, coal prices have been escalating strongly since 1QCY21. Not helping is Indonesia having a month-long ban on coal export in Jan as their stockpile was running critically low but this has since eased as it allowed miners to export as long as they meet the domestic market sales requirement. TENAGA had confirmed that it has received coal shipment from Indonesia which makes up 60% of its supply. As such, this also address the market concern about its coal supply issue.

4QFY21 result could get hit temporarily. Following escalated coal prices in 4QCY21, average spot price jumped another 10% QoQ to USD181/MT from USD164/MT in 3QCY21 after a 56% QoQ surge from USD105/MT in 2QCY21. In fact, average coal spot price soared 120% in 2021 to USD120/MT from USD61/MT in 2020. Last Friday, spot price closed at USD226/MT or average YTD of USD197/MT which was 9% higher than of in 4QCY21. As such, we expect coal cost to increase another 10% QoQ in 4QFY21, which amounts to c.RM400m from RM3.92b reported in 3QFY21. Without adjustment to ICPT, this should impact TENAGA’s 4QFY21 results. However, this is only temporary as the surcharge in Feb-Jun 2022 will neutralise its forward earnings. As such, we keep FY21-FY22 estimates unchanged.

Impose of surcharge to clear the air; OP retained. While there are no changes to base tariff, we are still positive given the surcharge imposed on non-domestic users signifying the fuel cost pass-through mechanism is indeed in place. In addition, forward FY22E PER of 10x seems fairly attractive which values the stock at 1.5SD below its 3-year mean. As such, we continue to rate the stock an OP with unchanged TP of RM11.41 which embedded a RM2.05 ESG discount from its mean valuation of RM13.46. It is also supported by a decent dividend yield of >4% with a potential special dividend. Downside risk to our recommendation is weaker-than-expected earnings from non- regulated businesses.

Source: Kenanga Research - 31 Jan 2022