Government has announced that the effective tariff rate will remain unchanged for both domestic users (37.95 sen/kWh) and non-domestic users (43.65 sen/kWh) in 2H22. Government will subsidize RM5.8bn for this measure. We estimate Tenaga will be able to recover RM7.8bn (lower than our estimated shortfall of c.RM9bn) from the subsidies and surcharges, significantly improving its receivables and cash flow in 2H22. Despite the shortfall (likely to be addressed in subsequent period), we are still overall positive on the announcement, signifying government’s commitment towards ICPT and IBR framework. Maintain BUY on Tenaga with unchanged TP of RM13.40 based on DCFE valuation.

NEWSBREAK

Tariff unchanged. Prime Minister Datuk Seri Ismail Sabri has announced that the effective electricity tariff will be maintained in 2H22 at current level. Government will have to subsidize RM5.8bn to maintain the tariff, as part of its measures to sustain the cost of living for the people. The announcement indicates the continuation of ICPT (Imbalance-Cost-Pass-Through) mechanism effective for Jul-Dec 2022 period. The higher fuel costs incurred in 1H22 and the outstanding RM2.8bn from 2H21, will be covered through surcharges of +3.70 sen/kWh (assumed be RM2bn) to non-domestic users and RM5.8bn subsidies by the government. Effective average tariff for nondomestic will be maintained 43.65 sen/kWh and domestic will be 37.95 sen/kWh.

HLIB’s VIEW

Positive. We are overall positive with the continuation of ICPT, thus allaying investor concern on regulatory risks. Tenaga will be able to recover an estimated RM7.8bn through the surcharges and government’s subsidies in 2H22, which will significantly address its ballooning receivables and improve cash flow as Tenaga needs to pay for the increasing fuel costs. However, we believe a similar situation has happened again (in 1H22, approved RM1.67bn vs shortfall of RM4.14bn), as the announced RM7.8bn has not fully addressed an estimated c. RM9bn shortfall of ICPT, due to timing of ICPT calculations. Management reaffirmed that the impact of the ICPT implementation is neutral on Tenaga and will not have any effect on its business operations and financial position.

Maintain BUY, TP: RM13.40. We maintain BUY on Tenaga with unchanged DCFEderived TP: RM13.40, given stable cash-flow and dividend payout. Tenaga’s earnings are expected to remain stable in FY22. We are positive with Tenaga’s long term commitment into the ESG growth path, while ensuring returns to shareholders.

Source: Hong Leong Investment Bank Research - 27 Jun 2022