Concerns over ICPT may affect TNB’s earnings


TENAGA Nasional Bhd’s (TNB) push for renewable energy (RE) may not reflect much in its earnings prospects due to concerns over the imbalance cost passthrough (ICPT) mechanism.

Maybank Investment Bank Bhd (Maybank IB) noted that TNB had closed its first RE deal for this year, making further progress with its renewable push for 8,300 megawatts (MW) by 2025.

“Nevertheless, soaring coal prices means concerns over the ICPT mechanism will continue to take centre stage,” Maybank IB said in a note yesterday.

The firm maintains a ‘Hold’ call for the group with an unchanged target price (TP) of RM9.30. Earnings forecast for TNB also remained unchanged.

“While valuations are attractive and environmental, social and governance concerns seemingly largely priced-in, we think the stock is unlikely to rerate significantly in the near term due to lingering concerns over the ICPT mechanism,” it said.

It also noted several risk factors for its earnings estimates, price target and rating for TNB.

Regulatory developments, such as the determination of regulated returns have a direct impact on earnings.

Changes in electricity demand patterns or plant outages could also result in a loss of earnings for TNB.

It said TNB via its wholly owned RE subsidiary in the UK, Vantage RE Ltd, acquired 97.3MW of UK onshore wind farms for RM805 million, from funds advised by Capital Dynamics which is an independent asset management firm.

Details of the acquisition, however, are limited.

“The acquired portfolio comprises 11 UK sites developed under either the Feed-in Tariff or Renewable Obligation Certificate subsidy regimes, thus providing some degree of revenue stability.

“The acquisition raises Vantage RE’s wind capacity from 433MW to 530MW, and TNB’s gross RE capacity from 3,479MW to 3,576MW,” it noted.

The firm viewed generation to be back at the pre-pandemic run-rate. Based on the latest operating logs, peninsula’s generation for the first quarter of 2022 (1Q22) was up by 1.8% year-on-year (YoY) and down 2.4% quarter-on-quarter (QoQ).

Meanwhile, coal prices continued to climb, with the new Newcastle spot averaging 35% higher QoQ in 1Q22.

“The under-recovery of TNB’s generation costs will continue. With the Industry Fund likely close to depleted, the government’s options to avoid fully passing-through a surcharge are increasingly limited,” it said.

The firm prefers Mega First Corp Bhd which it gave a ‘Buy’ call with a TP of RM4.30 and recommended ‘Buy’ as well for YTL Power with a TP of 90 sen.