• Expect ICPT to remain in surcharge for 2H18

• Uncertainties surrounding tariff hike dragging share price

• However, market price already partly discounting worst case scenario, value emerging

• Reaffirm BUY at unchanged TP of RM16.30, 5.3% yields

ICPT announcement coming up. The Energy Commission is slated to release the 2H18 ICPT and ultimately, the effective tariffs for 2H18. To recap, ICPT was in a surcharge position of 0.28sen/kwh for 1H18. However, effective charges to power consumers were unchanged as continuation of a 1.52sen/kwh rebate on top of the 0.28sen/kwh surcharge to consumers was footed by the EIF (Electricity Industry Fund). This amounted to a total of RM929m.

Share price dynamics. Tenaga’s share price has fallen 14%-15% post-elections. One of the key risks being priced into the stock in our opinion is the uncertainty surrounding an impending tariff hike given rising fuel cost and more importantly, whether the 1.5sen/kwh ICPT rebate given previously will be maintained (RM780m-785m for a semiannual period) and if so, who will bear the cost. Elimination of the rebate alone will raise effective tariffs to consumers by 4%. The ICPT is likely to remain in a surcharge for 2H18 (as 1H18 actual fuel costs were higher than RP2 parameters), estimated at RM302m for 2H18 (See Exhibit 2). In total, we estimate the cost to continue subsidising consumers at ~RM1.1b for 2H18.

Key moves in utilities so far. In the gas sector, the IBR was upheld with a hike in gas tariff to the non-power sector by RM1.02/mmbtu (+3.3%) a few weeks ago. This affected mainly the industrial consumers. On the flip side, in the broadband sector, the key player i.e. TM (share price) was bashed down after the Government made clear its intent to halve pricing and double broadband speeds, likely at the expense of TM’s margins.

Laying out the scenarios. To gauge how much risk has been priced into Tenaga’s share price, we simulate 4 possible scenarios into our valuations. Under the existing scenario, (1st scenario) we assume the incremental costs are allowed to be passed on to consumers based on IBR allowances or the Government finds means to subsidise consumers without impacting Tenaga’s IBR returns. Hence, our forecasts and DCF valuation remains. (2nd scenario) If Tenaga is asked to temporarily absorb the surcharge and continue the rebate for 2H18, our DCF-based TP falls to RM16.10 OR (3rd scenario) if Tenaga is asked to do this throughout RP2, our TP falls to RM15.60. (4th scenario) In the worst case scenario if Tenaga is asked to maintain the rebate and absorb the surcharge indefinitely (assuming ICPT surcharge remains at our 2H18 assumption of RM302m), our TP falls to RM11.80.

Source: MIDF Research - 29 Jun 2018