Energy, Green Technology  and Water  Minister  Datuk Seri Dr Maximus Ongkili announced that electricity rates in Malaysia  ex-Sarawak  will be revised  higher  by  an  average  14.9%  effective  1  Jan  2014.  Tenaga Nasional (TNB) confirmed this in a filing with  Bursa. This  is a  positive as  it would  prompt another  re-rating  of  TNB’s  share  price  in  the  near term.  Maintain  BUY,  our  FV  revised  up  to MYR11.90  (from  MYR10.65), based on revised FY14 P/E of 15.4x.

• Average  14.9%  hike.  Energy,  Green  Technology  and  Water  Minister Datuk  Seri  Dr  Maximus  Ongkili  announced  yesterday  that  electricity rates  in  Malaysia  ex-Sarawak  will  be  revised  higher  by  an  average 14.9%  to  38.5  sen  per  kWh  effective  1  Jan  2014.  Correspondingly, natural gas prices for power generation will be  raised  to MYR15.20 per million  British  thermal  unit  (mmbtu)  from  MYR13.70,  for  the  first  1,000 million  standard  cu  ft  per  day  (mmscfd)  while  the  remaining  200-300mmscfd of imported  liquefied  natural gas (LNG)  will be supplied at a fixed price of MYR41.68 per mmbtu.
• Government  to  save  MYR3.0-3.2bn  annually.  Based  on  our assumption  for  an average consumption of 1,250mmscfd, the  proposed hike is expected to save the Federal  Government some MYR3.0-3.2bn annually. We view this long-awaited announcement  as being in line with the Government’s reaffirmed stance  to  rationalize  subsidies.  Ultimately, the  tariff  revision  would be  a boon  for  TNB as this  may potentially mark the  commencement  of  the  much-anticipated  fuel  costs  pass-through mechanism that will allow the national utility to pass on the fluctuations in fuel costs to the end-consumer.
• Maintain BUY.  After factoring in:  i) the proposed  tariff revision come 1 Jan  2014;  ii)  the  expected  hike  in  TNB’s  fuel  expenses  at  a  blended natural gas cost of MYR18.30 for FY14F  and MYR20.60 for FY15F; and iii)  fine  tuning  TNB’s  other  operating  costs,  we  are  lifting  our  core earnings  forecasts  for  TNB  marginally  higher  by  1.5%  and  3.2% respectively.  Given  that  positive reforms  are finally materializing,  we peg a revised FY14 P/E of 15.4x (at  a  10% premium to its historical 5-year average of 14.0x). All in, our FV now stands at MYR11.90. Maintain BUY recommendation.

Four  components  contribute  to  tariff  hike.  In  its  filing  with  Bursa,  TNB  said  the Government  has  decided to raise  the average electricity tariff by 14.9% to 38.5  sen per kWh  (from the current average of 33.5  sen  per  kWh),  effective 1 Jan 2014. The quantum is premised on four components:
i)  The adjustment of domestic natural gas price to MYR15.20 per mmbtu (from MYR13.70 per mmbtu);
ii)  The price of imported LNG is fixed at MYR41.68 per mmbtu;
iii)  The  adjustment  in  the  base  price  for  coal  to  USD87.50  per  tonne  (from USD85 per tonne); and
iv)  The  adjustment in  TNB's base tariff,  which is being raised by 2.7%,  or 0.9 sen per kWh.

Other details. To help promote the utilization of renewable energy in the country, the Government has also decided to revise higher the collection from consumers for the renewable  energy  fund  to  1.6%  effective  1  Jan  2014  (from  1.0%).  The  1.6% collection  will  be  payable  by  all  electricity  consumers,  except  domestic  consumers who use  less than 300kWh per month. Other key  features  of the new tariff structure include: 
i)     Domestic  consumers  using  less  than  300kWh  per  month  will  not experience any tariff increase;
ii)    Both industrial and commercial consumers will experience an average increase of 16.9%; and
iii)    The electricity rebate by the Government for  domestic consumers with monthly bills of MYR20 or lower will be maintained.

Muted  impact  on  70%  of  domestic  households.  The  proposed  tariff  hike  would have muted impact on  an estimated  70% of  domestic  households  given that some 4.6m  of  TNB’s  existing  household  customers  consume  less  than  300kWh  of electricity  units  per  month.  We  believe  this  augurs  well  with  the  Government’s intention to minimize the inflationary impact on rising costs of living on low- to middleincome group.IBR scheme to be  implemented.  At the same time, TNB  said  the  base tariff  to be imposed  will be regulated under  the Incentive Based Regulation (IBR) by the Energy Commission moving forward. The IBR will be implemented over four years from 2014 to  2017.  In  essence,  this  implies  that  TNB  will  earn  a  net  return  equivalent  to  its WACC (at an estimated 8-9%) based on its regulated  transmission-  and distributionrelated utility  assets.  Its  generation  division,  meanwhile,  will be rewarded according to  pre-stipulated  performance  indicators  for  its  own  as  well  as  third  party-owned power plants.  We have yet to capture this into our model given the lack of financial details on the scheme at this juncture. We expect management to share more details on this in due course.

To  save  the  Government  MYR3.0-3.2bn  p.a.  Based  on  our  assumption  of  an average daily consumption of 1,250mmscfd, the  proposed price hike is expected to save  the  Federal  government  some  MYR3.0-3.2bn  annually.  We  think  this  longawaited  announcement  is  in  line  with  the  Government’s  efforts  to  rationalize subsidies. Ultimately, the tariff revision would be a boon to TNB as this will potentially mark  the  commencement  of  the  much-anticipated  fuel  costs  pass-through mechanism  to  help  the  national  utility  company  to  pass  on  the  fluctuations  in  fuel costs to its end-consumers.

Earnings revisions.  After factoring in:  i) the proposed tariff revision  on  1 Jan 2014; ii)  the  expected  hike  in  TNB’s  fuel  expenses  at  a  blended   natural  gas  cost  of MYR18.30 for FY14F and MYR20.60 for FY15F; and iii) fine tuning its other operating costs,  we  are  revising  TNB’s  core  earnings  forecasts  marginally  upwards  by  1.5% and  3.2%  respectively.  We  note  that  in  deriving  our  forecasts,  we  have   explicitly assumed that the incremental costs arising from imported LNG  would be borne by the Federal Government for now, until the new tariff structure comes into place on 1 Jan 2014.

Maintain  BUY.  In  view  of  the  fact  that  positive  sector  reforms  have  finally materialized, we are pegging a revised FY14 P/E of 15.4x (at 10% premium to  the stock’s  historical  5-year  average  of  14.0x).  With  that,  our  FV  now  stands  at MYR11.90. Maintain our BUY recommendation.

Financial Exhibits

SWOT Analysis

•   Periodic tariff revisions will help to ensure sustainability of the national utility company’s profitability in the long run

Company Profile
TNB is Malaysia's national utility company and has a near monopoly on the transmission and distribution of electricity in Pen insular Malaysia and Sabah

Recommendation Chart

Source: RHB