• ICPT rebate stays at 1.52sen/kwh for 1HCY17

• Subsidised piped gas price raised by RM1.50/mmbtu to RM21.20/mmbtu

• If coal price and the RM stays at current levels we do not rule out possibility of rebates diminishing

• Re-affirm BUY at unchanged DCF-derived target price of RM16.80/share. 4% yield looks attractive.

Effective tariffs maintained for 1HCY17. Tenaga announced that the ICPT rebate for 1HCY17 will be maintained at 1.52sen/kwh. Base tariffs remain at 38.53sen/kwh (up till end of the current IBR period in end-2017), which means there is no change in effective tariffs to consumers compared to the 2HCY16 period. According to Tenaga, the ICPT rebates amount to RM766m and this is made possible due to lower LNG price, higher contribution from coal plants and lower contribution from gas plants. Similar to previous periods, the ICPT does not impact domestic consumers consuming less than 300kwh/month.

Gas tariffs raised. In line with the rollback in gas subsidy, piped gas tariff for the power sector is raised by another RM1.50/mmbtu to RM21.20/mmbtu for 1HCY17. While the price of feed gas is raised, coal powered plants’ share of generation has gradually risen i.e. from as low as 45% of total generation when the IBR was implemented in 2014 to ~52% now, gradually reducing reliance on gas plants. Based on the EC’s approved generation mix, coal contribution is expected to rise further to 58% in 2017 and 62% in 2019.

Coal generation is still a lot cheaper. The cost of generation using coal is a lot cheaper than gas (made more significant by rising piped gas price) at an estimated 10sen/kwh versus 18sen/kwh for gas powered plants. The next big coal capacity to come on-stream will be Tenaga’s 1,000MW Manjung 5 plant, scheduled for operations in October 2017 and the 2,000MW Jimah East Power in 2019.

Lower LNG uptake. Higher coal contribution also means the amount of market priced LNG consumed is lower. As a recap, subsidies piped gas is limited to a maximum of 1000mmscf per day, meaning excess consumption has to be met by LNG which is market priced at around RM30/mmbtu (vs. subsidised piped gas price at RM19.70/mmbtu in the previous period). LNG now makes up just 11% of gas consumption vs. up to 18% a year ago. On top of this, spot LNG price had also reduced from USD6.80/mmbtu in 1H16 to USD6.40 in 2HCY16.

Rebates might diminish if current prices stay. Notwithstanding higher coal contribution to the generation mix, spot coal price and the USD had admittedly risen substantially in the later part of 2H16. Estimated CIF coal price now stand at USD77/mt and the USD at RM4.45 vs. 2HCY16’s USD71/mt and USD:RM4.16. We estimate Tenaga will turn into an under-recovery position against the ICPT assumptions if current prices prolong for the 1HCY17 period and this could mean diminishing ICPT rebates.

Recommendation. Our numbers are unchanged as we had previously factored in elements of cost and tariff inflation into our projections. We re-affirm our BUY call on Tenaga at unchanged DCF-based TP to RM16.80/share. We like Tenaga for: (1) Dividend catalyst on the back of FCF yield of ~7% over FY17F/18F, a relatively under-geared balance sheet at 0.35x and the upcoming capital optimisation exercise (2) Overseas expansion provides scope for stronger growth in the mid-term (3) Strong earnings visibility post-ICPT implementation. Capital management and the resolution of its RM2b tax issue with the Inland Revenue Board are key catalysts over the next 12 months. 4% dividend yield looks attractive.

Source: MIDF Research - 15 Dec 2016