Tenaga falls 1.4% on sentiments over upcoming electricity tariff cut

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KUALA LUMPUR (February 16): Tenaga Nasional Bhd (TNB) fell as much as 1.4% in the morning trade session today, following the announcement of a cut in electricity tariffs by the government.

At 10.35am, TNB (fundamental: 1.3; valuation: 1.8) was down 16 sen or 1.1% at RM13.78, with some 2.7 million shares traded. The counter earlier declined as much as 20 sen or 1.4% to reach a low of RM13.74, and was among the top decliners on the exchange.

Despite the lower tariffs, analysts had maintained their calls on the utilities company, as they were expected to have a neutral effect on TNB’s earnings.

In a note today, MIDF Research maintained its “buy” call on Tenaga, with an unchanged target price of RM17.20.

The research house said that the reduction in tariff was in line with the implementation of the imbalance cost pass through (ICPT) mechanism, under the incentive based regulation (IBR) framework.

“In our view, the recent tariff reduction will have a neutral impact on TNB’s financials. Nevertheless, its share price has declined by 6% due to negative sentiments on the issue,” said MIDF.

The research house said the stock continues to trade at undemanding valuations of between 11 times to 12 times price-earnings ratio for FY15 and FY16, and said that the current weakness is a good opportunity for investors to accumulate TNB shares.

Similarly, Affin Hwang Capital Research also maintained its "buy" rating on the stock, with a TP of RM17.50.

“We remain positive on TNB upon management clarifying the imbalance cost pass-through (ICPT) mechanism is intact. Management reiterated the direction of tariffs (to be reviewed every 6 months) would depend on the extent of over or under-recovery from fuel costs,” said the research house.

Furthermore, Affin Hwang expects TNB to have good earnings visibility, as the company can utilise savings from the renegotiated power purchase agreements for future under recoveries, if there is any delay in the ICPT.

“We maintain our buy call on TNB with an unchanged DCF-based 12-month target price of RM17.50.

“We still like TNB for: i) its expected rebound in electricity-sales growth; ii) benign coal prices; and iii) indirect fuel-cost pass-through implementation,” the research house said.

(Note: The Edge Research's fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations.)