• Upgrade to BUY from Neutral, with an unchanged MYR10.40 TP, 13% upside and c.6% FY24F yield. Our call is premised on the limited regulatory risk as the Government continues to uphold the Imbalance Cost Pass-Through (ICPT) framework with consistent payment to Tenaga Nasional. As such, we expect the ICPT receivables to trend lower, relieving working capital pressure amidst moderating coal prices.

• Tariff adjustments. Last Friday, the Government announced several tariff adjustments which are: i) High-consumption domestic users with 1,500 kWh and above or equivalent to a monthly bill of MYR708 will be imposed with a 10sen/kWh surcharge, ii) surcharge reduction of 20sen/kWh to 3.7sen/kWh for new category of non-domestic consumers, namely state water and sanitation operators, and iii) surcharge reduction of 20sen/kWh to 17sen/kWh for medium-voltage and high-voltage industrial and commercial users. Domestic users with consumption of less than 1,500 kWh will continue to enjoy the same 2sen/kWh rebate. Following that, TNB announced the ICPT mechanism will remain in place for 2H23.

• ICPT receivables to trend lower. Such adjustments are somewhat within expectations as the domestic segment remains largely subsidised and reflects a slight decrease in average fuel prices to USD173.50/tonne in 1H23 from USD224/tonne in 2H22. The total ICPT cost to be recovered in 2H23 is estimated at MYR9bn, based on the current fuel price trend. As the Government is committed to subsidise MYR5.2bn in 2H23, we estimate that the remainder will be collected from the surcharges imposed. Note that TNB has received MYR9.13bn out of total MYR10.4bn ICPT cost recovery from the Government. This demonstrates the Government’s commitment in upholding the Incentive Based Regulation (IBR) framework and ICPT mechanisms. As such, we expect ICPT receivables to be lower on the back of the lower ICPT charge.

• Upgrade to BUY. While keeping our earnings estimates, we upgrade TNB to BUY with an unchanged DCF-based TP of MYR10.40. We see limited regulatory risk as the Government has upheld the ICPT framework, ensuring its defensive earnings profile coupled with lesser working capital strain given the moderation of coal prices. Our TP also factors in an ESG discount of 10%, based on our ESG score of 2.5. Valuation wise, the stock is currently trading at 10.4x FY24F P/E, which is below its 5-year mean of 11.8x. Foreign shareholdings fell slightly to 12.86% as of May (4Q22: 13.1%). TNB, in our view, has to pursue its expansion in renewable energy (RE) more aggressively in order to achieve its 8.3GW target by 2025 (1Q23: 3.9GW).

• Downside risks: Higher operating costs and greater-than-expected plant outages.

Source: RHB Research - 26 Jun 2023