The government last Friday announced a 10 sen/kWh surcharge on heavy domestic users, i.e., those who consume >1,500 kWh monthly, effective 1 Jul 2023. However, the surcharge on low voltage non-domestic users will be cut to 17 sen/kWh from 20 sen/kWh previously. We maintain our forecasts, TP of RM10.64 (WACC: 7.1%; TG: 2%) and OUTPERFORM call as the initiatives are neutral on TENAGA’s earnings.

Targeted surcharge for domestic users in 2HCY23. Last Friday, the Energy Minister revealed the introduction of targeted subsidy for the first time for electricity users in Peninsular Malaysia with an electricity tariff surcharge of 10 sen/kWh on domestic users who consume more than 1,500 kWh per month (or equivalent to a monthly bill of RM708), on top of the base-tariff of 39.95 sen/kWh, while domestic users consuming <1,500 kWh per month will continue to enjoy a 2 sen/kWh rebate. This would affect 83,000 households or 1% of total domestic users with a minimum monthly electricity bill increase of RM187 or 25%.

Lower surcharge for non-domestic segments. With a lower average coal price of USD173.5/MT in 1HCY23 from USD224.0/MT in 2HCY22, tariff surcharge for non-domestic medium and high voltage users will be reduced to 17 sen/kWh from 20 sen/kWh. Meanwhile, non-domestic users comprising water and sewerage operators will receive a reduction in surcharge from 20 sen/kWh to 3.7 sen/kWh. The low voltage and the specific agricultural tariff category of non-domestic users will continue to be charged a surcharge rate of 3.7 sen/kWh.

Earnings neutral to TENAGA. While this surcharge adjustment is neutral to TENAGA’s earnings with a 6-month lag effect as the shortfall is filled up by government payments (subsidy), we are pleased to see the government’s effort to rationalise subsidies with targeted subsidy. On the other hand, as fuel costs decline, TENAGA during its recent analysts briefing guided for a lower Imbalance Cost Pass-through (ICPT) of RM9.0b in 2HFY23 vs. RM16.2b in 1HFY23. This will result in its ICPT receivables declining to RM10.2b by Jun 2023 from RM16.9b in 4QFY22. This would result in stronger cash flows for TENAGA by lowering its debts and interest serving cost in 2HFY23.

Forecasts. Maintained.

We continue to like TENAGA for: (i) its dominant position in power generation, transmission and distribution in Malaysia, (ii) its defensive earnings backed by a resilient domestic economy and assets that are largely regulated, and (iii) its heavyweight index-linked stock status. In addition, its dividend yield is decent at >4%. Maintain OP with unchanged DCF-derived TP of RM10.64 (WACC: 6.7%; TG: 2%), after imputing a 5% discount (due to its 2-star ESG rating) to our DCF derived valuation of RM11.20.

Risks to our recommendation include: (i) ballooning under-recovery of fuel costs, straining its cash flows, (ii) a global recession hurting demand for electricity, and (iii) non-compliance of ESG standards set by various stakeholders.

Source: Kenanga Research - 26 Jun 2023

The Government Last Friday Announced a 10 Sen/kWh Surcharge on Heavy Domestic Users, I.e., Those Who Consume >1,500 KWh Monthly, Effective 1 Jul 2023. However, the Surcharge on Low Voltage Non-domestic Users Will be Cut to 17 Sen/kWh From 20 Sen/kWh Previously. We Maintain Our Forecasts, TP of RM10.64 (WACC: 7.1%; TG: 2%) and OUTPERFORM Call as the Initiatives Are Neutral on TENAGA’s Earnings. Targeted Surcharge for Domestic Users in - Lower Surcharge for Non-domestic Segments.