KUALA LUMPUR: CIMB Equities Research is keeping its Add call for Tenaga Nasional and raised the target price to RM17.60 as its current undemanding valuation was largely due to uncertainty over the tariff review for Regulatory Period 2 (RP2, 2018-2020).
“We believe this concern eased with the electricity base tariff rate revised up to 39.45 sen/kWh until 2020,” it said on Wednesday.
It said the target price was pegged to a higher FY19F price-to-earnings (P/E) of 14 times, based on the sector average (vs. 12.8 times two-year mean P/E previously).
CIMB Research said the Energy Commission (EC) hosted an analyst briefing on the electricity tariff review in Peninsular Malaysia for the Incentive-based Regulation (IBR) under the RP2.
To recap, the average base tariff in 2014 (trial-run period of IBR) and regulatory period 1 (RP1, 2015-2017) was 38.53 sen/kWh, an increase of 4.99 sen/kWh (+14.89%) from the previous average of 33.54 sen/kWh in 2011.
The average base tariff for RP2 will be 39.45 sen/kWh, an increase of 2.4% vs. RP1.
“Tenaga’s regulated return is reduced to 7.3% for RP2 vs. 7.5% for RP1, but the enlarged regulated asset base will boost the return on assets in RP2, in our view.
“Given the higher-than-expected regulated return vs. our estimate of 7%, we revise up our FY18-19F earnings by 2.5%-2.7%,” it said.
CIMB Research also said the EC also clarified that the announced RM929mil imbalance cost pass-through (ICPT) rebate of RM1.80 sen/kWh to maintain the tariff for the period of Jan 1 to June 30, 2018, will be borne by Tenaga, “which is a negative surprise to us”.
According to EC, this will not impact Tenaga’s earnings, as the amount will be absorbed by the group via savings from unutilised capex and opex approved in RP1.
“We have yet to clarify with Tenaga on the potential earnings impact from ICPT.
“We projected a 0.5 percentage point regulated return reduction in our FY18-19F forecasts, which is higher vs. the actual 0.2%-pts reduction announced in RP2.
“Hence, we revise up our FY18-19F earnings by 2.5%-2.7% to factor in the regulated return of 7.3% vs. our estimate of 7% previously.
“We bump up our target price to RM17.60, pegged to a higher FY19F P/E of 14 times based on the sector average (vs. 12.8 times two-year mean P/E previously). In our view, Tenaga should at least trade on par with peers given its decent yield and return on equity,” it said.
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