This article first appeared in The Edge Financial Daily on December 18, 2018

Tenaga Nasional Bhd
(Dec 17, RM12.92)
Maintain buy with a lower target price (TP) of RM14.60: The imbalance cost of Tenaga Nasional Bhd (TNB) for the period of July to December 2018 was announced at RM1.8 billion, which translates into 3.43 sen/kWh.

However, not all of the imbalance cost will be passed through the imbalance cost pass-through (ICPT) mechanism for the first half of financial year 2019 (1HFY19) given the cost and revenue adjustments for TNB.

Post-adjustments, the imbalance cost that will be passed through amounts to RM948 million, translating into a 2.15 sen/kWh average monthly surcharge for 1HFY19, higher than the 1.35 sen/kWh currently paid.

Domestic consumers will continue to be subsidised by the KWIE (Electricity Industry Fund).

For the first time, the Incentive-Based Regulation (IBR) revenue cap and price cap adjustments are factored into the ICPT mechanism — in Regulatory Period 1, this was supposed to be done at the end of the regulatory period.

The revenue cap adjustment was determined at RM367 million, and there were also several other items factored in, including refunds of excess single-buyer working capital.

All in, adjustments, including revenue and price cap adjustments, amount to RM564 million. The adjustments were higher than our earlier expectations given the variance in forecast sales volume as well as other revenue adjustments made (refunds) that were earlier unanticipated.

The ICPT pass-through for 1HFY19 will be done on a staggered basis to allow for an adequate transition period for non-domestic consumers.

For January to February 2019, the ICPT surcharge is maintained at 1.35 sen/kWh, while for March to June 2019, the ICPT surcharge will be increased to 2.55 sen/kWh. All in, this should work out to an average 2.15 sen/kWh surcharge per month.

Given the higher-than-expected revenue adjustment for TNB, we have made adjustments accordingly to our sales forecasts and revised down our FY19 earnings forecast by 7% to RM6.1 billion.

Our FY18 earnings forecasts are unchanged.

Following the downward revision of our earnings forecasts, our TP has been revised down to RM14.60 per share (from RM16.80 per share earlier).

However, our “buy” call has been maintained, following an already steep share price correction after TNB’s weak third financial quarter ended Sept 30, 2018 results released recently.

Our dividend yield forecast is decent at 4.1% (based on a more conservative 50% payout assumption).

Key catalysts include: i) Peaking capital expenditure (the cycle suggests room for a dividend upside); and ii) possible monetisation of backbone fibre assets via partners. — MIDF Research, Dec 17