Government linked companies have come under the spotlight, with the Government saying there is a need to review their role. However, as far as the energy sector is concerned, analysts believe that the Government is committed to carrying out reforms, boding well for Tenaga Nasional Bhd (TNB).
According to UOB Kay Hian, a regulatory meeting reaffirmed its view that the Government is committed to carrying out energy reforms, including the gas subsidy rationalisation programme. As such, it believes the government will continue to subscribe to the incentive-based regulation, which promotes asset efficiency. The research house noted that the market has underestimated the potential size of stabilisation funds (which include existing funds from TNB generator and independent power producer contributors) to be made available to the government to maintain the imbalance cost pass-through (ICPT) surcharges in the next three years, assuming coal and gas prices continue to rise.
This, it said, would lift the “regulatory overhang” issue on the stock, which has shed 10% in value since the start of the year.
Shares of TNB closed two sen down at RM13.82 yesterday.
The electricity tariff for the second half of the year is slated to be announced in the next few days.
“We believe the Government will maintain the current electricity tariffs and utilise funds from the Electricity Industry Fund (or more commonly known as Kumpulan Wang Industri Elektrik (KWIE)) to offset the rising coal cost incurred by TNB in the past six months till June,” the research house said in a report yesterday.
UOB Kay Hian expects TNB to recover the higher coal costs incurred in the first half through the ICPT mechanism, and the stock is likely to benefit from policy clarity as regulatory risk dissipates thereon.
The ICPT mandates the utility returns or clawback uncontrollable fuel price fluctuations (coal, gas, LNG), and anchors its future earnings sustainability and predictability.
Given the rising fuel prices, there were some concerns on the ICPT’s continuity, given that the framework has yet to be tested under such an environment.
Fuel prices have remained unchanged since March 22 this year despite global oil prices soaring to more than US$70 per barrel.
The government has approved seven periods of ICPT implementation, with around RM6.3bil in rebate approved as at December 2017.
“We estimate a RM910mil (or 3.7% of base tariff ) cost under recovery for the first half of this year.
“This reflects the rising coal prices versus the reference price of US$75 per tonne and a bi-annual gas price hike of RM1.50 per one million British thermal units.
“We believe there are adequate funds in the KWIE should the government decide to maintain the current electricity tariff,” it said.
In the first quarter of financial year 2018 (Q1’18), TNB’s core earnings excluding forex gains came in at RM2bil, while revenue stood at RM12.3bil.
Electricity demand during the period grew 2.3% year-on-year, driven by higher demand in the industrial and domestic sectors.
TNB’s Q1’18 base tariff was 39.6 sen/kWh.