In a note today, HLIB Research said it remained positive on TNB’s earnings outlook under the Regulatory Period 2022-2024 (RP3) and Imbalance Cost Pass-Through (ICPT) mechanisms.
The Energy Commission (EC) announced the RP3 for Malaysia’s electricity industry in late January, after more than a year of delay from its original start date of 2021, with average base electricity tariff unchanged from RP2 2018-2020 levels of 39.45 sen per kilowatt hour (kWh).
“TNB’s management believes the new government will remain committed towards ICPT. In the short term, the company will continue to incur higher working capital in order to finance the high fuel energy costs. The government is providing a financing guarantee of up to RM6 billion,” HLIB noted.
The research house said the EC has approved RM7 billion of ICPT, whereby RM5.8 billion was subsidised by government, in the first half of 2022 (H1 FY2022) to be recovered in H2 FY2022.
It said TNB’s management has guided potential ICPT approval of RM16.4 billion in H2 FY2022 and is confident the new government will continue to honour the ICPT mechanism as it has since implementation in 2014, and TNB will be able to recoup the entire amount within six months.
The ICPT is calculated based on an estimated actual fuel cost and generation-related costs for a particular six-month period against the corresponding baseline costs in the base tariff.
Since 2015, the government has successfully implemented 16 ICPT cycles, and has provided “protection” amounting to RM 11.7 billion. This includes the most recent RM5.8 billion subsidies for ICPT implementation from July to December this year, to cushion the impact of high fuel prices, according to TNB’s website.
During the same period, the government has passed-through a total of RM9.35 billion ICPT rebate to all customers in Peninsular Malaysia.
HLIB said it was also positive with TNB’s long-term commitment to the environmental, social, and governance (ESG) growth path, while ensuring return to shareholders.
Meanwhile, CGS-CIMB maintained an ‘add’ call on TNB with an unchanged TP of RM13.60, guided for the upcoming ICPT amount to be higher at RM16.4 billion in H1 2023 versus RM7 billion in H2 2022.
It noted that the fluctuations in fuel price is not expected to impact TNB’s earnings as the government has continuously upheld the Incentive Based Regulation (IBR) framework and ICPT mechanism historically.
“We like TNB as it will likely keep its monopoly position in the electricity transmission and distribution segment.
“It also has decent dividend yields of more than 5% for FY2022 to FY2024, and is poised to benefit from Malaysia’s energy transition, that is, additional grid investments and renewable energy opportunities, which could boost its earnings and improve the public’s ESG perception of TNB,” it added.