CIMB Research retains hold for Tenaga, lower TP on RP2 adjustments

CIMB Research retains hold for Tenaga, lower TP on RP2 adjustments.

KUALA LUMPUR: CIMB Equities Research is retaining its hold recommendation for power giant Tenaga Nasional but at a lower target price of  RM13.60 from RM14.60 as it may feel the impact of the regulatory period 2 (RP2) adjustments in the fourth quarter.

It said on Tuesday the government has approved the continued implementation of the imbalance cost pass through (ICPT) mechanism for Jan 1 to June 30 of 2019.

The average base tariff is unchanged at 39.45 sen/kWh. Given the higher fuel and generation costs for the period of July 1 to Dec 31, 2018 (average coal price of US$97.8 per tonne versus the estimated coal price of US$75 a tonne under RP2, the additional cost was RM1.8bil  or a 3.43 sen/kWh ICPT surcharge.

To cushion the impact of higher cost, the government has approved the following measures: (i) the ICPT surcharge of RM308mil for domestic customers will be funded by Kumpulan Wang Industry Elektrik (KWIE); and (ii) part of the surcharge for non-domestic customers amounting to RM564mil will be funded from cost and revenue adjustment of Tenaga for year 2018 under RP2. 

Therefore, only RM948mil of the remaining ICPT will be passed-through on a staggered basis for non-domestic customers.

CIMB Research pointed out for Jan 1 to Feb 28 of 2019, the ICPT surcharge will remain at 1.35 sen/kWh; for March to June, the ICPT surcharge will be 2.55 sen/kWh. This is an average ICPT surcharge of 2.15 sen/kWh for January to June.

“This staggered ICPT surcharge is a one-off implementation to allow ample notice and provide adequate transition period. To recap, the ICPT surcharge was 1.35 sen/kWh for the period of July to December 2018.

“The cost and revenue adjustments under RP2 could be done on an annual basis, judging from the recent ICPT announcement. We gathered that there could be a revenue reversal in 4Q18 to factor in the adjustments,” it said.

Under RP1(2014-2017), the adjustments were made at the end of RP1 where RM929mil ICPT rebate for the period of Jan 1 to June 30, 2018 was borne by Tenaga via savings from unused expenditures (c.RM2.5bil) approved in RP1. Tenaga made provisions throughout the RP1 period and hence no earnings impact.

“We cut our FY18-20F EPS by 6-14% to factor in the potential revenue reversal, higher staff costs and tax rate. Maintain hold given the earnings and regulation risk. TP is revised to RM13.60, based on a 10% discount to sector average FY19F P/E of 14 times,” it said.