PETALING JAYA – A power tariff hike in the second half (H2) of the year is still a possibility as Tenaga Nasional Bhd (TNB) is likely to record an under-recovery in coming quarters, said Affin Hwang Capital.
TNB started to record lower “over-recovery” revenue under the imbalance cost pass through (ICPT) mechanism in the second quarter (Q2) at RM191 million relative to RM605 million in the first quarter (1Q), due to the increase in coal price.
“As management expects coal prices to rise above US$80/mt, we believe that it is likely that TNB will record an under-recovery in coming quarters, and this could lead to a higher tariff in H2 which is in line with the ICPT mechanism,” it said in its report last Friday.
“The price hike could be a stock re-rating catalyst, as there have been concerns that the government might not follow through with the ICPT as the election cycle approaches.”
It said overall cost was a surprise on the upside, as TNB continues to record higher provisioning on its receivables, which is likely to continue as management has taken what it views as “prudent” approach on all its receivables.
It noted that the higher finance costs are driven by both the issuance of the US dollar sukuk in Q2 and the reclassification of some finance costs related to the construction of its plant which were previously capitalised.
According to Affin Hwang Capital, TNB indicated it had submitted its suggestions on the return on the regulated asset base last month and was in the process of negotiating with the government on the outcome.
“Our base-case scenario is that the government would allow TNB to maintain the return at 7.5%; assuming a worst-case scenario of 7%, we believe the impact to earnings would be capped at around 5%,” it said.
It maintained a “buy” rating TNB with a 12-month target price of RM16.50. It believes that under the ICPT mechanism, the increase in fuel costs will be earnings neutral to TNB, hence company fundamentals remain unchanged.
Meanwhile, MIDF Research said demand growth could taper off into H2 off a stronger base last year, although overall demand growth was resilient for Q2 as well as H1.
“Industrial demand finally showed positive growth (1.3% year-on-year) in Q2 while the commercial segment was also up by 1.3%. We conservatively stick to our forecast demand growth of 2% versus actual year-to-date growth of 2.3% for the time being but note that TNB should ultimately benefit from higher production and trade numbers,” it said in its report.
It said TNB’s Q1 results came within estimates and would have been stronger if not for higher coal prices. Core earnings in Q1 were up 6% year-on-year on the back of a 6.4% year-on-year increase in revenue, driven by a 1% demand growth and a marginal increase in average rates achieved of 39.4 sen/kWh.
It said that fuel cost was higher, in particular coal at US$70/mt CIF which was up 22% year-on-year. Coal contribution in the mix dropped to 50% in Q2 from 54% in Q1 due to coal plant outages but was buffered by lower LNG price and lower gas consumption.
MIDF Research re-affirmed its “buy” call at an unchanged target price of RM16.80 with capital management, overseas expansion and the resolution to its RM2 billion tax issue with the Inland Revenue Board being key catalysts over the next 12 months.
“TNB is a liquid proxy to the gross domestic product growth outperformance and stronger trade, but share price has yet to move meaningfully relative to the broader market. At just 11.6 times FY18F PE TNB trades at a discount to sector average of 13 times and the index’s 16-17 times,” it said.