Analysts positive on outlooks for power sector and TNB

Research houses believe the firm will not be impacted by the govt’s announcement on electricity tariffs


Analysts remain positive on the power sector and national power company Tenaga Nasional Bhd (TNB), despite the government’s announcement that electricity tariffs would remain the same for Peninsular Malaysia until 2020.

Most research houses reiterated their ‘Buy’ call for TNB, as the company would not be impacted by the announcement.

AmInvestment Bank Research and MIDF Research both remain their ‘Overweight’ and ‘Positive’ calls respectively on the power sector, with TNB as the top pick in the sector.

Public Investment Bank Bhd and Hong Leong Investment Bank Bhd (HLIB Research) are also positive on the utility giant after the power company’s share price posted gains after the announcement.

TNB on Dec 26, 2017, announced that the government has given its approval for the electricity tariff in the current tariff schedule of Peninsular Malaysia to be maintained for the period of Jan 1, 2018, until Dec 31, 2020.

The current rates in Sabah and Labuan will remain unchanged until June 30 this year.

The rates in Peninsular Malaysia stand at 38.53 sen per kilowatt hour (sen/kWh) and 34.52 sen/kWh in Sabah and Labuan.

For Peninsular Malaysia, this is the end of the first phase of the three-year Incentive-Based Regulation (IBR) — where under the Imbalance Cost Pass-done to fix the tariff rate every three years.

The implementation of phase two leads to the rates being maintained until Dec 31, 2020, which means there will be no changes in tariff for domestic and commercial users in Peninsular Malaysia for the next three years.

In a filing to Bursa Malaysia, TNB also said the government would be spending RM929.37 million from Jan 1, 2018, to June 2018 to maintain an electricity tariff rebate of RM1.80/ kWh for consumers.

The rebates for Sabah and Labuan will be maintained at RM1.20/kWh.

From March 2015 until June 2018, TNB said a total of RM6.3 billion would be spent on providing electricity tariff rebates in Peninsular Malaysia and RM1.63 billion on fuel and tariff rebates in Sabah and Labuan.

MIDF said under the new fuel price assumptions in the second framework regulatory period (RP2) base tariff,

ICPT in the first half of 2018 (1H18) is still effectively in a surcharge position of 0.28 sen/kWh.

This means actual fuel cost incurred is higher than the revised forecasts under RP2, which factors in a longer term view on fuel prices.

It said although exact details on fuel price assumptions for RP2 have not been released, it roughly simulated the impact of higher coal price and US dollar assumptions against RP1 fuel cost forecast.

It cited several reasons why base rates could be maintained despite higher fuel price — which include coal mix assumption being higher for RP2 at 57%, Bloomberg’s three-year coal price forecast at US$70 (RM284.20) per tonne compared to US$87.50 per tonne for RP1, and lower market priced liquefied natural gas take-up given higher coal mix in the generation.

“The decision whether to continue subsidising consumers beyond 1H18 lies with the government, but the fact that TNB has been kept neutral from the government’s subsidy decision in the past two ICPT reviews is positive in keeping the IBR mechanism intact and ensuring TNB’s earnings stability.

“Should the government decide to discontinue subsidising tariffs for consumers, TNB has the right to pass on the ICPT surcharge (or rebates) to consumers directly,” it added.

MIDF maintained a ‘Positive’ outlook on the power sector with TNB given a ‘Buy’ due to dividend catalyst on the back of an under-geared balance sheet and capital optimisation exercise.

Its confidence on the utility giant is also supported by overseas expansion that provides scope for stronger growth in the mid-term and strong earnings visibility post-ICPT implementation.

HLIB Research expects TNB’s earnings and cashflow to be stable due to the implementation of the IBR and ICPT mechanisms.

“The expected IBR revision to lower return on regulated assets by 2018 will be offset by new contributions from associates and power plants.

“Shareholders also stand to benefit from higher dividend payout,” it said. The research house is maintaining a ‘Buy’ call on TNB with an unchanged target price of RM17.

Public Investment Bank in a research note said there will be a neutral impact to TNB however, as the cost will be subsidised by the government.

“Going forward, TNB will continue to benefit from the ICPT mechanism as it would shield the group from exposure to fluctuations in fuel and generation costs, resulting in earnings stability and visibility,” it said.

Public Investment Bank maintained its ‘Outperform’ stance on TNB.