Concerns remain
The belated imposition of a tariff surcharge (from Feb 2022) is a welcome relief. The government will directly fund the delta for household users. The depletion of the Industry Fund means concerns over
the ICPT mechanism will continue to linger in our view. Maintain HOLD with an unchanged MYR9.60 TP (DCF-based). We prefer Mega First (MFCB MK, BUY, CP: MYR3.53, TP: MYR4.30) in the utilities space.
Higher net tariffs, domestic users exempted
The regulator has announced that the prevailing 39.45sen/kWh base tariff will be maintained from Feb 2022 throughout RP3 (2022-2024). A 3.7sen/kWh surcharge will be imposed (2.0sen/kWh rebate previously). Net tariff from Feb 22 is thus raised by 15.2% to 43.15sen/kWh. Meanwhile, the government will maintain a 2.0sen/kWh rebate for domestic (household) users by injecting MYR715m into the Industry Fund (possibly the cause for the previous tariff announcement delay). Net tariffs for household users are thus unchanged.
Buffer depleted for now
The government’s direct funding confirms our suspicions that the Industry Fund is now close to depleted. With coal prices remaining extremely elevated, the under-recovery of Tenaga’s generation costs will
continue. The government will again have to directly fund any potential future tariff reliefs, thus straining its fiscal position. Alternatively, it will have to fully push through a surcharge, which may be politically
unpalatable. Concerns over the ICPT mechanism will continue to linger.
RP3 details are undisclosed
RP3 details have not been disclosed, thus it is unclear how Tenaga’s RP3 base earnings have changed. Our earnings forecasts and MYR9.60 TP (DCF-based assuming 8.4% WACC and 1% LT growth) are unchanged. While valuations are attractive, we think the stock is unlikely to re-rate significantly due to lingering concerns over the ICPT mechanism.