• Keep NEUTRAL, new MYR9.60 TP from MYR9, 5% upside. While the earnings impact of a selective tariff hike and higher subsidy commitment by the Government is neutral to Tenaga Nasional, it should provide some breather to strained cash flows and gradually ease off TNB’s escalated trade receivables – depending on the schedule of the subsidy payments.

• Tariff adjustments. Last Friday, the Government decided to impose a 20 sen/kWh surcharge on industrial and commercial users in 1H23. The exception: i) Low voltage users (Tariffs B and D) and ii) low and medium specific agriculture categories (Tariffs H, H1, and H2), which will be still imposed with a 3.7 sen/kWh surcharge. Meanwhile, the domestic tariff remains the same with a 2sen/kWh rebate.

• Higher subsidy from the Government. According to the Government, total imbalance cost pass-through (ICPT) costs in 2H22 stood at MYR16.2bn, ie equivalent to a surcharge of 27 sen/kWh. Following such tariff adjustments, the total subsidy borne by the Government is estimated at MYR10.8bn, which is almost double from the MYR5.8bn in subsidies provided in 2H22. This means c.90% of users in West Malaysia will not be affected by the tariff hike and implies a MYR5.4bn recovery from the remaining 10% of users.

• The earnings impact to TNB – in our view – is neutral, as the under- or over-recovery of fuel costs would have been reflected in the P&L statement every quarter – the tariff surcharge is merely to recoup the costs incurred in the next six months. However, we do not discount the possibility that consumption may be impacted, given that the additional 20 sen/kWh surcharge would translate into an average tariff increase of c.32% and 39% for those affected within the industrial and commercial segments. The Government has yet to decide on the schedule of the MYR10.8bn subsidy payment to TNB, but we believe it could be done on a monthly basis, just like the previous MYR5.8bn subsidy, which has been fully recovered by the group in 2H22. Depending on the timing of the subsidy payments, we should expect better operating cash flows as a result of grading easing in trade receivables in 2023.

• We keep our forecasts but increase TP to MYR9.60 with a lower discount of 20% from 25% to intrinsic value and an unchanged 4% ESG discount, premised on the easing of regulatory risks to uphold the ICPT framework. Note: The Malaysian Electricity Supply Industry 2.0 or MESI 2.0 initiatives’ implementation have been put on hold since the change of administration in 2020. Therefore, we will not be surprised if some of these reforms are revived to drive the industry to be more competitive with better offerings to consumers. Downside risks: Higher operating costs and higher-than- expected plant outages. The opposite represents the upside risks.

Source: RHB Research - 19 Dec 2022