This article first appeared in The Edge Financial Daily on July 26, 2018
Power sector
Maintain overweight: We believe Tenaga Nasional Bhd (TNB) and YTL Power International Bhd will not be affected by the recent change of government and ongoing policy review exercises. We maintain “buy” on TNB with an unchanged target price (TP) of RM17.50, on stable earnings and cash flow with new contribution from Jimah East (2019) and SIPP (2020). We also maintain “buy” on YTL Power with a higher TP of RM1.45 (from RM1.25), on its limited earnings downside with upcoming new contributions from 45%-owned Jordan Attarat Power (2020) and 80%-owned Indonesia Tg Jati Power (2022).
The recent announcement of higher effective electricity tariffs under the imbalance cost pass-through (ICPT) mechanism has firmed up our view on the continuation of incentive-based regulation (IBR)/ICPT mechanisms. Given “zerorisation” of the goods and services tax, the net impact of electricity charges to end users vary between -3% and +2%. Nonetheless, TNB will remain neutral from the fluctuation of fuel prices (gas, liquefied natural gas and coal) under cost past-through to end users under ICPT (in terms of rebates or surcharges), while electricity demand will remain healthy on the immaterial net change in electricity tariffs.
The Electricity Industry Fund (KWIE) balance was RM760 million when the government announced a RM114 million tariff subsidy (domestic users only) for the second half of 2018 (2H18), indicating leftover of RM646 million (or higher) by end-2018. Assuming coal prices to hover at the US$100 (RM406) to US$120 per tonne level and the government to maintain the subsidy policy (domestic users only), the government may disburse RM120 million to RM150 million for every six-month ICPT review and KWIE funds are sufficient to cover for another four ICPT reviews into end-2020.
We believe the risk is minimal for TNB’s independent power producers (IPPs) being part of the list being cancelled/reviewed. TNB has already exerted due diligence evaluation when acquiring the 70% stake in Jimah East (2015) and 51% stake in SIPP (2017), indicating appropriate returns for these IPPs.
Post disappointments in financial year (FY17), YTL Power’s nine-month of FY18 (9MFY18) core earnings have rebounded due to commencement of the Paka power purchase agreement extension and stable contribution from Wessex Water. We believe the drag from Seraya Power will subside with the insolvency of Tuaspring Power (Hyflux). We expect YES to gain from increasing subscriber base and lower traffic costs from the regulated Mandatory Standard on Access Pricing price reduction starting 2018. Earnings growth can be expected from the operation commencement of Attarat (2020) and Tg Jati (2022).
YTL Power has exercised substantial share buy-backs since June 2018 and today has accumulated 4.92% of total outstanding shares (2.8% prior to June). Moreover, major shareholders YTLC and YTL family have also been acquiring stakes in YTL Power. We believe there is a high chance that YTL Power will distribute treasury shares in FY19 and FY20, as YTL Power’s treasury shares surpass the level of 5% of total outstanding shares, as a reward for long-term shareholders. — Hong Leong Investment Bank Research, July 25