KUALA LUMPUR: Affin Hwang Capital Research continues to maintain its bullish outlook on Tenaga (TNB) with a Buy call with an unchanged target price of RM16.50.
It said on Thursday that concerns over the higher fuel cost and lower weighted average cost of capital (WACC) have been exaggerated.
“We believe the Imbalance Cost Pass-Through (ICPT) remains intact and thus the cash flow for TNB remains predictable, allowing management to pay close to 50% of its profit as dividend as per its new dividend policy,” it said.
Affin Hwang Research said there were concerns that the TNB might not be able to pass on the higher fuel cost to consumers in the next tariff adjustment in June, as a hike might not resonate well with voters pending the 14th General Elections (GE14).
As this is not the first time the tariff has been revised up under the ICPT, and given the government’s decision to allow fuel pump prices to increase (close to 18% since December 2016) to reflect the market price, “we believe the government is likely to follow through with the ICPT in June and December”, said the research house.
The ICPT is important to TNB as it provides certainty to the profitability and stability of cash flow of its distribution and transmission businesses.
“We do not think that the government will lower the WACC on the regulated assets from the current 7.5% for the next regulated period (2018-2020).
“As the current market parameters are similar to when the government was determining the WACC for the regulated period 2014-2017, we believe there is a high possibility it will keep the WACC as it is.
“The recent decision to maintain the gas sector WACC at 8.0% could indicate the government’s willingness to allow operators to maintain a reasonable return,” it said.
Affin Hwang Research said both the concerns on the ICPT and WACC will likely be addressed by the end of the year.
“As the outcome becomes clear by then, we believe it would act as a positive catalyst for the stock. The government decision will also likely have an impact on the TNB board decision regarding the full-year dividend payout for FY17.
“We are maintaning our Buy call on TNB with an unchanged DCF-based TP of RM16.50 (WACC: 8.0%, LT growth rate: 3%), as we believe that the government will maintain the ICPT mechanism, and the regulated assets base return at 7.5%.
"The stability will provide management with better clarity on its cash flow, and improve its ability to pay out dividends at close to 50%, the higher end of its official dividend payout policy. Key risks: if the concerns on the ICPT and WACC were realized,” said Affin Hwang Research.
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