KEY INVESTMENT HIGHLIGHTS

• ICPT surcharge reduced by 0.55sen/kwh to 2sen/kwh

• Market coal price has gradually eased since 1Q18

• Possibilities of further ICPT surcharge reduction should current trends sustain

• Following recent sharp price correction, we see value emerging.

• Upgrade to Trading Buy (from Neutral), TP maintained at RM14.40

ICPT surcharge reduced. The Government has approved the ICPT (imbalance cost pass-through) for the 1H20 period (which retrospectively reflects 2H19 cost movements). Base tariff stays at 39.45sen/kwh as determined for RP2 but ICPT surcharge is reduced by 0.55sen/kwh to 2sen/kwh. This is applicable to non-domestic consumers while domestic consumers will continue to remain subsidized by the KWIE. Domestic consumer ICPT surcharge subsidy for the 1H20 period amounts to RM63m and this will be funded by the KWIE. An amount of RM774m has been channeled by Tenaga to KWIE in FY19 consisting mainly of excess revenues from revenue & price cap entities of RM641m.

Fuel cost has been easing. The reduction in ICPT surcharge is largely due to the reduction in coal price in the period. Against a peak of circa USD90/mt back in 1Q18, market coal price (5500kcal type, FOB price) has gradually eased to around USD50/mt now (See Exhibit 1). However, average applicable coal price (the price Tenaga charges generators) of USD77.35/mt (CIF price) in 2H19 is still higher than RP2 benchmark coal price of USD75/mt (CIF), resulting in the ICPT surcharge remaining in the latest review, albeit lower.

Possibility of further reduction. We expect this to narrow further in the next ICPT review, should the market coal price sustain at current levels or trend lower further. The lower coal price is partly offset by a gradual increase in regulated gas price (by RM1.50/mmbtu every 6 months) to RM28.70/mmbtu until the regulated gas price reaches reference market price. For FY20F, we foresee an increase of coal contribution in the generation mix given the coming on-stream of Jimah East, which should contribute to a further reduction in overall generation cost (coal generation cost is ~24% cheaper than gas, on our estimates).

Cash flow impact. The ICPT decision is positive for Tenaga’s cash flows, but quarterly earnings have already largely reflected the ICPT due to/from Tenaga. It however, does re-affirm Tenaga’s earnings visibility.

Source: MIDF Research - 9 Dec 2019