TNB’s lower tariff may have minimal impact

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Tenaga Nasional Bhd
(Feb 12, RM13.64)
Maintain neutral rating with an unchanged target price of RM14.64.
We expect minimal impact to the top and bottom lines of Tenaga Nasional Bhd (TNB) resulting from the lower electricity tariff.

If we assume reductions of 2.25 sen per kilowatt hour (kWh) across domestic, commercial and industrial sectors for Peninsular Malaysia and 1.2 sen per kWh for Sabah Electricity Sdn Bhd for four months from March to June 2015, our financial year 2015 (FY15) revenue will drop by a marginal of 1.7%.

The slight decline in revenue will be offset by partial imbalance cost pass-through (ICPT) savings recorded in FY15, lower fuel cost, and better generation mix moving forward.

TNB will further benefit from the commissioning of the Manjung 4 coal-fired power plant (targeted commercial operation date March 31, 2015) by taking advantage from current low coal prices of below US$65 [RM236] per tonne.

We maintain our forecast and assumptions for now, hence retain our “neutral” call on TNB with a TP of RM14.64.

The government through the Ministry of Energy, Green Technology and Water announced yesterday that electricity tariff will be reduced by 2.25 sen per kWh or 5.8% from current average tariff of 38.53 sen per kWh for Peninsular Malaysia and by 1.2 sen per kWh or 3.5% from an average tariff of 34.52sen per kWh for Sabah and Labuan respectively.

The lower electricity tariff will take effect from March 1, 2015 until June 30, 2015.

The decision by the government to share the ICPT savings of RM726.99 million with consumers was part of the power sector reform initiative, known as incentive-based regulation (IBR) framework due to favourable fuel prices and generation cost.

We expect there will be minimal impact to the top and bottom line of TNB arising from this lower tariff.

Though the management expects a slight decline in revenue during the lower tariff period, we

believe the earnings will be intact as lower revenue will be offset by the partial ICPT savings in FY15, lower fuel cost, and better generation mix moving forward.

To recap, electricity tariff under the IBR framework consists of two components, base tariff and ICPT. Under ICPT, the fuel cost will be reviewed every six months and any over- or under-recovery in the fuel cost due to the fluctuation in the fuel prices (namely gas, liquefied natural gas, coal and alternative fuel) and other generation costs will be passed through by reducing or increasing the end-user tariff.

Arising from lower fuel and generation cost due to softening of fuel prices globally and higher coal-based generation, the government has decided that ICPT savings of RM726.99 million will be passed to consumers through lower electricity tariff. Average electricity tariff for Peninsular Malaysia will be decreased by 5.8% or 2.25 sen per kWh from an average of 38.53 sen per kWh to 36.28 sen per kWh.

Though the ICPT mechanism is not implemented in Sabah and Labuan, the government had also decided to reduce the average electricity tariff for Sabah and Labuan by 3.5% or 1.20 sen per kWh from an average tariff of 34.52 sen per kWh to 33.32 sen per kWh.

Domestic consumers with above 300 kWh electricity consumption per month and all commercial and industrial users in Peninsular Malaysia, Sabah and Labuan will enjoy the lower electricity tariff from March 1, 2015 to June 30, 2015.— PublicInvest Research, Feb 12

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This article first appeared in The Edge Financial Daily, on February 13, 2015.