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This article first appeared in The Edge Financial Daily on July 5, 2018

Tenaga Nasional Bhd
(July 4, RM14.40)
Maintain hold with an unchanged target price (TP) of RM16:
The imposition of a tariff surcharge in the second half of 2018 (2H18) (the first to be borne by consumers) has removed a major overhang over the integrity of the pass-through mechanism. We thus expect some reversal of the stock’s recent losses. Going forward, however, we are wary that the market has not yet digested a likely earnings step-down in the second regulatory period (RP2).

The regulator has announced that the present 1.52 sen per kilowatt hour (kWh) tariff rebate in Peninsular Malaysia will be discontinued, and a 1.35 sen/kWh tariff surcharge (amounting to RM698 million) to be imposed for 2H18. Net tariff is thus slated to rise by 7.6% to 40.8 sen/kWh in 2H18. Domestic users (households using less than 300kWh monthly) get some relief as the surcharge for this segment would be funded by the Electricity Industry Fund. Industrial and commercial users meanwhile are not subsidised.

This is the first time since the implementation of the Incentive Based Regulation (in 2014) that consumers would have to bear a tariff surcharge (recall the 0.28 sen/kWh surcharge in 1H18 was funded entirely by the Electricity Industry Fund). This announcement thus alleviates recent concerns over the integrity of the pass-through mechanism. Longer term, we do not rule out Tenaga Nasional Bhd’s (TNB) valuation multiple possibly expanding as doubts over the pass-through mechanism fully dissipates.

Our earnings forecasts and TP, which are based on reference fuel prices, are unchanged. Our TP of RM16 is derived from a discounted cash flow (DCF), assuming 7.5% weighted average cost of capital and 1% long-term growth. Going forward, we are still wary that the street has yet to digest the likely earnings step-down in RP2. — Maybank IB Research, July 2

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