• 1H19 ICPT-surcharge raised, staggered implementation

• Revenue cap adjustments factored into ICPT higher than earlier expectation

• FY19F earnings revised down 7%

• TP lowered to RM14.60 (from RM16.80) but BUY maintained after sharp price correction

Higher imbalance cost. Imbalance cost for the period of Jul-Dec18 was announced at RM1.8b which translates to 3.43sen/kwh. However, not all of the imbalance cost will be passed through via ICPT in 1H19 given cost and revenue adjustments for TNB. Post-adjustments, imbalance cost that will be passed through amounts to RM948m, translating to a 2.15sen/kwh average monthly surcharge in 1H19, higher than the 1.35sen/kwh current paid. Domestic consumers will continue to be subsidised by the KWIE (Electricity Industry Fund).

Revenue cap adjustments. For the first time, IBR revenue cap and price cap adjustments are factored into ICPT – in RP1 this was supposed to be done at end of regulatory period. Revenue cap adjustment was determined at RM367m and there were also several other items factored in including refunds of excess single buyer working capital (refer to Exhibit 2). All in, adjustments, including revenue and price cap adjustments, amounted to RM564m. The adjustments were higher than our earlier expectation given variance in forecast sales volume as well as other revenue adjustments made (i.e. refunds) that were earlier unanticipated.

Staggered ICPT pass-through. The ICPT pass through for 1H19 will be done on a staggered basis in order to allow adequate transition period for the non-domestic consumers. For Jan-Feb19, ICPT surcharge is maintained at 1.35sen/kwh while form Mar-June19 ICPT surcharge will increase to 2.55sen/kwh. All in, this should workout to an average 2.15sen/kwh surcharge per month (See Exhibit 2).

Earnings revisions. Given the higher than expected revenue adjustments for Tenaga, we make adjustments accordingly to our forecast sales and revise down our FY19F earnings by 7% to RM6.1b. FY18F earnings is unchanged.

Recommendation. Following the downward revision to earnings, our TP is revised down to RM14.60/share (from RM16.80/share earlier). However, our BUY is maintained following already steep share price correction after Tenaga’s weak 3Q18 results recently. Dividend yield is decent at 4.1% (based on a more conservative 50% payout assumption). Key catalysts: (1) Peaking capex cycle suggests room for dividend upside (2) Possible monetisation of backbone fibre asset via partners.

Source: MIDF Research - 17 Dec 2018