Tenaga will no longer enjoy the benefit of higher average base tariffs from changes in customer mix under regulatory period 2 (RP2) as the Distribution Network is now under a revenue cap instead of a price cap.
KUALA LUMPUR: CIMB Equities Research is maintaining its Hold call for Tenaga Nasional although its share price has retraced about 9% since end-March 2018. The new target price is RM15 compared with the previous RM16.70.
The research house said on Tuesday the factors were firstly, potential changes in regulations and policies for the utilities sector.
Secondly, the lingering earnings risks as the stable regulated earnings may not be able to offset the earnings downside from the expected step-up in tax rate due to a reduction in reinvestment allowance.
“Although its dividend yield remains decent at c.4%, we view that weaker earnings and unfavourable macros will not support a re-rating in the near term,” it said.
CIMB Research revised its target price to RM15, as it applied a 10% discount to sector average FY19F P/E of 14 times to factor in risks from sector reform.
The key downside risks to its call are lower-than-expected electricity demand, weaker contribution from associates and potential sector reform.
The key upside risks are stronger-than-expected earnings from associates and higher electricity sales.
The research house recently met up with Tenaga to seek more clarity on the Incentive-based Regulation (IBR).
“We gathered that Tenaga will no longer enjoy the benefit of higher average base tariffs from changes in customer mix under regulatory period 2 (RP2) as the Distribution Network is now under a revenue cap instead of a price cap. The surplus of the revenue will be channelled back to the IBR system after the annual review,” it said.
In total, Tenaga transferred RM2.65bil to Kumpulan Wang Industry Elektrik (KWIE) as of early-2018.
“We estimate the KWIE account should have c.RM300mil at the moment after deducting ICPT costs of: (i) RM1.303bil for the July-December 2017 period, (ii) RM929mil for the January-June 2018 period, and (iii) c.RM100mil for the July-December 2018 period.
“The balance of RM300mil will likely be used to buffer domestic customers from the future ICPT surcharge,” it said.
Last week, Energy, Technology, Science, Climate Change and Environment Minister Yeo
Bee Yin said that the ministry will review the independent power producer (IPP) contracts that have been awarded through direct negotiations in order to keep generation costs under control.
The government subsequently decided to terminate four IPP contracts.
“We believe more sector reform initiatives may be in the pipeline as the minster has highlighted affordable, sustainable as well as secured electricity.
“We see risk for power generators, particularly for: (i) power plants with expiring power purchase agreements (PPA), and (ii) upcoming plants awarded through direct negotiations.
“Power plants with PPAs expiring in the near term may not get an extension due to the high excess power reserve of 28.8% as of 2016. We gather that PPAs of three of Tenaga’s plants (c.760MW) are expiring in 2018-2020 while three new plants (c.3,500MW) are coming on board in 2018-2020,” said CIMB Research.
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