Lack of clarity on RP3 parameters pose earnings risk for TNB

by ASILA JALIL / pic credit:

TENAGA Nasional Bhd (TNB) is expected to see potential earnings risk from the less favourable parameters of the Regulatory Period 3 (RP3) which the government has approved for implementation.

CGS-CIMB Securities Sdn Bhd analyst Ngo Siew Teng, nevertheless, reiterated an ‘Add’ call for the power utility given its undemanding valuation and decent dividend yield of less than 5%.

“We see potential earnings risk from less favourable RP3 parameters and possible additional contribution for electricity rebates in order to ease the people’s burden.

“Our target price of RM10.88 is based on 12 times CY23F price-to-earnings ratio, as we apply a 20% discount to its five-year historical P/E of 15 times to factor in the regulatory risks,” she wrote in a research note on TNB last week.

On Jan 28, TNB stated that the Malaysian government has approved the implementation of incentive-based regulation (IBR) tariff under RP3 (Feb 22-Dec 24) with an unchanged current average electricity tariff at 39.45 sen/kWh for Peninsular Malaysia.

The government has approved the continued implementation of the imbalance cost pass through (ICPT) mechanism for the period of Feb 1 until June 30, 2022.

The delay in the IBR RP3, which was supposed to be effective from Jan 1, 2022, was due to the government’s shift in priorities towards the recent flood crisis.

“While the implementation of RP3 and continuity of ICPT is a relief to investors, we view the lack of clarity on RP3 parameters as one of the near-term risks.

“We leave our forecasts unchanged given the impact of ICPT implementation is neutral on TNB and will not affect its business operations and financial position, and there is no further information on the asset base size or returns of the regulated assets under RP3,” the analyst added.

The broker firm forecast a 30 basis points cut in regulated returns of 7% and a 3% regulated asset base growth per annum for RP3. Ngo still favours TNB as it will likely maintain its monopoly position in the electricity transmission and distribution segment.

TNB also offers decent dividend yields of less than 5% for financial year 2021 (FY21) until FY23 and it is poised to benefit from Malaysia’s energy transition with additional grid investments and renewable energy opportunities.

Stronger than expected earnings from associates and favourable RP3 parameters are key potential rerating catalysts.

The key downside risks to the stock are weaker contributions from associates and potential sector reforms/regulatory changes that could negatively affect TNB’s earnings, she added.

In a filing to Bursa Malaysia last week, TNB noted that Putrajaya had approved and decided on the implementation of RP3 via a letter from the Energy Commission.

“The government has decided to maintain the current electricity tariff schedule for all customers in Peninsular Malaysia. Thai decision complies with the rules and regulation under the Regulatory Implementation Guidelines,” it said in the exchange filing.