TENAGA (5347) : Tenaga Nasional - No tariff hike until June 2015
Target RM13.62 (Stock Rating: HOLD)
We were negatively surprised by the government's statement that there would be no increase in electricity tariff until June 2015. The RM1.68bn cost will be borne by the government through 1) IPP savings, and 2) foregone revenue by Petronas as subsidised gas prices have been maintained at RM15.20/MMBtu. The total cost translates into a hypothetical tariff hike of 3.11 sen/kWh. Tenaga remains a Hold, with an unchanged target price of RM13.62, based on 12.9x FY16 earnings, implying a 20% discount to the market, which we think is merited given Tenaga's lack of long-term earnings visibility.
What Happened
Media outlets have reported that the government has decided that there will be no increase in electricity tariff until June next year. Energy, Green Technology and Water Minister Datuk Seri Maximus Ongkili said that the government will bear the cost of RM1.68bn through the utilisation of IPP savings. The RM1.68bn is for the FCPT cost from Jan 2014 to Jun 2014 of RM465.9m, the cost for July 2014 to Dec 2014 of RM382m and foregone revenue by Petronas of RM836m. The foregone revenue by Petronas comes from the fixed price of subsidised piped gas of RM15.20/MMBtu, which was supposed to have been raised by RM1.50/MMBtu every 6 months as well. The RM1.68bn cost translates into a hypothetical tariff hike of 3.11 sen/kWh or 8% of the existing tariff. According to the minister, after absorbing the Fuel Cost Pass Through (FCPT) costs to maintain the current tariff, the balance in the IPP savings is only RM170m and insufficient to offset future FCPT cost components.
What We Think
This is negative for Tenaga as the FCPT implementation is taking a step back. Although the minister has said that there will be no tariff hike until June 2015, implying that the next hike will take place then, we believe that this decision is the government’s to make and there is no guarantee that a hike will go through even at that time. While, in the near term, Tenaga's earnings are expected to be stable, underpinned by lower coal prices and improved coal generation, we maintain our view that the FCPT is needed to cover for the risk of higher generation costs due to myriad potential factors.
What You Should Do
Tenaga remains a Hold, with an unchanged target price of RM13.62, based on 12.9x FY16 earnings, which is a 20% discount to the market P/E. We think Tenaga's discount is merited given the uncertainty pertaining to its longer-term earnings visibility.
Source: CIMB Daybreak - 07 November 2014
Target RM13.62 (Stock Rating: HOLD)
We were negatively surprised by the government's statement that there would be no increase in electricity tariff until June 2015. The RM1.68bn cost will be borne by the government through 1) IPP savings, and 2) foregone revenue by Petronas as subsidised gas prices have been maintained at RM15.20/MMBtu. The total cost translates into a hypothetical tariff hike of 3.11 sen/kWh. Tenaga remains a Hold, with an unchanged target price of RM13.62, based on 12.9x FY16 earnings, implying a 20% discount to the market, which we think is merited given Tenaga's lack of long-term earnings visibility.
What Happened
Media outlets have reported that the government has decided that there will be no increase in electricity tariff until June next year. Energy, Green Technology and Water Minister Datuk Seri Maximus Ongkili said that the government will bear the cost of RM1.68bn through the utilisation of IPP savings. The RM1.68bn is for the FCPT cost from Jan 2014 to Jun 2014 of RM465.9m, the cost for July 2014 to Dec 2014 of RM382m and foregone revenue by Petronas of RM836m. The foregone revenue by Petronas comes from the fixed price of subsidised piped gas of RM15.20/MMBtu, which was supposed to have been raised by RM1.50/MMBtu every 6 months as well. The RM1.68bn cost translates into a hypothetical tariff hike of 3.11 sen/kWh or 8% of the existing tariff. According to the minister, after absorbing the Fuel Cost Pass Through (FCPT) costs to maintain the current tariff, the balance in the IPP savings is only RM170m and insufficient to offset future FCPT cost components.
What We Think
This is negative for Tenaga as the FCPT implementation is taking a step back. Although the minister has said that there will be no tariff hike until June 2015, implying that the next hike will take place then, we believe that this decision is the government’s to make and there is no guarantee that a hike will go through even at that time. While, in the near term, Tenaga's earnings are expected to be stable, underpinned by lower coal prices and improved coal generation, we maintain our view that the FCPT is needed to cover for the risk of higher generation costs due to myriad potential factors.
What You Should Do
Tenaga remains a Hold, with an unchanged target price of RM13.62, based on 12.9x FY16 earnings, which is a 20% discount to the market P/E. We think Tenaga's discount is merited given the uncertainty pertaining to its longer-term earnings visibility.
Source: CIMB Daybreak - 07 November 2014
