• ICPT pass-through for non-residential consumers

• Decision for narrower scope of subsidy reduces EIF burden

• Removes a major overhang on regulatory risk post-elections

• Reaffirm BUY at unchanged TP of RM16.30, 4.9% yields

ICPT pass-through for non-residential. The EC announced an ICPT surcharge of 1.35sen/kwh for 2H18 which will be passed on for nonresidential consumers. The 2H18 ICPT surcharge, or cost underrecovery, amounts to a total of RM698m. We also understand that the previous 1.52sen/kwh rebate has expired on 30th June, which means that 2H18 tariff effectively increases by 7.6% or a total 2.87sen/kwh for non-residential consumers. Both the rebate and ICPT surcharge in 1H18 was previously subsidised by EIF (Electricity Industry Fund). For residential consumers however, the ICPT surcharge will continue to be subsidised by the EIF for 2H18.

Reduces burden on EIF. The decision to subsidise only residential consumers helps to reduce the burden on EIF, which would have depleted to an estimated RM571m post 1H18 subsidy. The residential segment accounts for just 22% of total power demand. Extrapolating from this we estimate only RM155m of the total RM698m 2H18 ICPT surcharge, as well as RM175m of an estimated RM785m (1.52sen/kwh) in rebates will be funded by the EIF. The remaining (i.e. sales to nonresidential sectors) will be absorbed by an ICPT pass through as well as the elimination of the previous 1.52sen/kwh rebate. In comparison, in 1H18, some RM929m of EIF funds were used to subsidise consumers across the board.

Removes a major overhang. The decision to allow a cost pass through sends a positive signal to the market in that the new Government is willing to bite the bullet to pass through higher generation costs and uphold the IBR framework; a perceived risk previously that drove down Tenaga’s share price 14%-15% postelection. This is in fact the first time ICPT is allowed to be passed through since turning into a surcharge a year ago.

Time to bottom fish? Tenaga’s share price has been bashed down quite substantially, presumably given the perceived risk on its ability to attain a tariff hike, and secondly, given Tenaga’s reasonably high foreign shareholding (of 24%) among index stocks. Given substantial price depreciation in the past month, we see value emerging. Our TP remains unchanged at RM16.30, and our BUY call is reaffirmed. Dividend yields are now attractive at 5.3% (+ve spread against 10yr MGS of 4.26%) while valuations are cheap at 11x FY18F earnings, a substantial discount to the market’s 16x-17x.

Source: MIDF Research - 2 Jul 2018