The Energy Commission has announced the electricity tariffs for 1H24. The targeted subsidy mechanism for households will be widened via the removal of rebates for users with monthly electricity consumptions exceeding 600kWh until 1,500kWh, while tariffs for other households as well as commercial and industrial customers will remain unchanged. While the tariff revision is neutral on TENAGA’s earnings, the continuous drop in ICPT receivables will improve TENAGA’s cash flow and potentially lead to higher dividend payments. Reiterate Buy on TENAGA with an unchanged TP of RM11.00/share based on DCF valuation (k: 7.2%, g: 1.4%).

Removal of Rebate for Households Above 600kWh Per Month

The Energy Commission (EC) has announced the electricity tariffs for 1 Jan 2024 to 30 Jun 2024 period (1H24) under the Imbalance Cost Pass-Through (ICPT) mechanism. ICPT refers to a mechanism under the Incentive-Based Regulation (IBR) which allows tariffs to be adjusted every six months based on fluctuations in global fuel prices (coal and natural gas) so that any changes in costs can be passed on to the customers in the form of rebates or surcharges.

For 1H24, the electricity tariffs for commercial and industrial customers will remain unchanged but the targeted subsidy mechanism for households will be widened via the removal of rebates for users with monthly electricity consumptions exceeding 600kWh until 1,500kWh (Figure 1). These households will no longer qualify for the 2sen/kWh rebate available previously. Tariffs for all other households are maintained.

According to the EC, a total of 85% or 7mn domestic consumers in peninsular Malaysia will not be affected by the electricity tariff adjustment for 1H24. The total subsidies for 1H24 amounted to RM1.9bn, which is significantly lower than the RM5.2bn seen in 2H23 and RM10.8bn in 1H23, as costs of coal and natural gas have trended lower.

Our Take

The widening of targeted subsidies by removing rebates for high electricity users does not come as a surprise as this was already announced in Budget 2024. While the tariff revision is neutral on TENAGA’s earnings for FY24, the removal of rebates for high electricity users indirectly decreases the ICPT receivables for TENAGA in 1H24. Note that in early Nov 2023, TENAGA has received RM2.35bn ICPT cost recovery for Jul to Sep 2023 period. The government’s commitment to uphold the ICPT mechanism has aided in reducing the group’s ICPT receivables. Evidently, the utility giant’s ICPT receivables has declined over the past quarters in tandem with the drop in fuel costs and consistent payment received from the government (Figure 2, 3). The expected continuous drop in ICPT receivables will improve TENAGA’s cash flow and potentially lead to higher dividend payment.

Impact

No Change to Our Earnings Forecasts.

Valuation

Reiterate Buy on TENAGA with an unchanged TP of RM11.00/share based on DCF valuation (k: 7.2%, g: 1.4%).

Source: TA Research - 26 Dec 2023