1H19 tariff review likely a litmus test for pass-through mechanism for TNB

This article first appeared in The Edge Financial Daily, on October 24, 2018.
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Tenaga Nasional Bhd
(Oct 23, RM14.08)
Maintain hold with a target price (TP) of RM16:
Recent quotes from Energy, Green Technology, Science, Climate Change and Environment (mestecc) Minister Yeo Bee Yin reaffirm our views that the fuel-cost pass-through mechanism remains relevant; carbon tax for power generation is not in the immediate pipeline, and the renewable push will involve more creative methods rather than outright subsidies. Overall, we are encouraged by the minister’s relatively balanced messages.

Mestecc minister was quoted in a press conference that while tariffs are dependent on fossil fuel prices, she is not in favour of specifically raising tariff for the green agenda due to the difficulties caused to the poor. She also disclosed that carbon tax is not in her ministry’s pipeline. It appears that feasibility studies on the implementation of carbon taxes remain in the infancy stage.

Separately, the Net Energy Metering scheme will be improved where electricity produced will theoretically be sold back (to the grid) at the customer’s net tariff (about 50 sen per kilowatt hour (kWh) compared with an average displaced cost of about 31 sen per kWh previously), thus enhancing savings for small-scale generators of solar energy. A lease concept has also been introduced, where leasors (including GSPARX Sdn Bhd — a wholly-owned subsidiary of Tenaga Nasional Bhd or TNB, a TNB entity) can install solar panels for interested customers at no upfront cost (monthly electricity cost savings would then accrue to the leasor). In addition, there will be a new round of tender for large-scale solar plants in 2019.

Our earnings forecasts and TP are unchanged. Our TP of RM16 is derived from a discounted cash flow, assuming 7.5% weighted average cost of capital and 1% long-term growth. With high coal prices throughout the second half of 2018 (2H18), the upcoming 1H19 tariff review would again serve as a litmus test for the pass-through mechanism. — Maybank IB Research, Oct 23