The ICPT surcharge is to continue in 1H19 given the rising coal prices reaffirming the government's commitment towards the fuel cost passthrough mechanism. We continue to like TENAGA for its earnings quality as we believe the recent sell-down on industry reform concerns is excessive. With its heavy index-weighted status, we believe it is still undervalued at current CY19 PER level of 11x. BUY with a TP of RM16.45 based on CY19 14x PER. 

TENAGA announced that the Government, via the Energy Commission (EC), had approved the continuation of the ICPT for 1H 2019, where (i) the average base-tariff remains unchanged at 39.45 sen/kWh and (ii) due to higher fuel and generation costs for 2H 2018, additional cost of RM948m or 2.15 sen/kWh ICPT surcharge will be passed through. The surcharge will only be applicable to non-domestic customers while the surcharge for domestic customers amounting to RM308m will be funded by Kumpulan Wang Industri Elektrik (KWIE). 

Earlier in July, it was announced by the Energy Ministry that the fund available for KWIE was RM760m. Should fuel costs remain high at the current level, the KWIE is likely to be exhausted by 1 H2020. In any case, we still believe any extra fuel costs will be transferred to all customers under the principle or spirit of ICPT mechanism. 

Share price of TENAGA came under some selling pressure falling 11 % in the past one month following the Energy Minister's comment of disrupting the power industry by not limiting the focus to generation segment but improving efficiency across the supply chain, including transmission and distribution. We believe TENAGA should be able to face the challenges given its entrenched position with existing extensive infrastructures that should give it a cost-advantage over the new-comers. In addition, with its efficiency record, TENAGA should be able to stand up to the competition. 

Source: Rakuten Research - 17 Dec 2018