Waiting for RP3 parameters
■ We see higher regulatory risks for TNB’s earnings arising from the recent developments, i.e. delay of RP3 and ICPT surcharge.
■ TP is cut to RM10.88, with a 20% discount to reflect the regulatory risk.
Carbon pricing will likely be earnings-neutral for power generators
We hosted Tenaga’s (TNB) management during our annual Malaysia Virtual Corporate Day last week. Overall, investors were concerned about the delay in the incentive-based regulation’s (IBR) third regulatory period (RP3, 2022-2024), whether the imbalance cost pass-through (ICPT) mechanism will be kept, the coal shortage issue and earnings risk from the introduction of a carbon pricing mechanism. We gather that the carbon pricing framework is still in the preliminary stages with no further details and the additional cost arising from carbon pricing for power generators will likely be passed through.
Delay in RP3 due to flood crisis
TNB clarified that the delay of IBR RP3 was due to the government’s shift in priority to the recent flood crisis. Hence, the government has decided to continue with the current parameters of IBR RP2 extension and imbalance cost pass-through (ICPT) mechanism effective from 1 Jan 2022 until further notice. To recap, the regulated return for RP2 extension (2021) was 7.3% with an expected closing regulated asset base (RAB) of RM62.4bn. We gather the RP3 paper was ready and awaiting approval from the cabinet, which will be revisited after the flood situation has eased; the higher fuel costs for the period of Jul-Dec 21 will likely be borne by the government and the Kumpulan Wang Industri Elektrik (KWIE) fund.
New electricity tariff could be out anytime soon
We expect the RP3 parameters and new electricity tariff to be revealed in the near term as Energy and Natural Resources Minister Datuk Seri Takiyuddin Hassan said in an article in Bernama dated 9 Jan 22 that the government has studied the new electricity tariff and will make an announcement soon. The minister said the new tariff under RP3 (2022-2024) will not burden the people as the government has considered the country’s recovery from the economic crisis following the pandemic, especially domestic account holders. While the potentially lower regulated return in RP3 could be negative for Tenaga, the higher asset base will likely mitigate earnings downside, in our view. We forecast a 30bp cut in regulated return and 3% RAB growth p.a. for RP3 (FY22-24F forecasts).
We see potential earnings risk from less favourable RP3 parameters/ICPT mechanism and possible additional contribution for electricity rebates in order to ease the people’s burden given the recent news flow. Our TP is revised to RM10.88, based on 12x CY23F P/E, as we apply a 20% discount to its 5-year historical P/E of 15x to factor in the regulatory risks. Reiterate Add given its undemanding valuation (c.-2 s.d. from its 5-year historical P/E of 9.5x), and decent dividend yield of >5%.