TENAGA (5347) - Tenaga Nasional - Tariff reduced
Target RM18.42 (Stock Rating: ADD)
We believe that the government’s announcement on the tariff reduction today is positive, as it would allow Tenaga's FCPT mechanism to gain public credibility. This gives us comfort that future tariff movements are likely to proceed more smoothly than in the past. On the tariff reduction itself, the market had a kneejerk reaction yesterday which presents a good opportunity to accumulate the stock. Tenaga remains an Add, with an unchanged target price of RM18.42.
What Happened
Today, the government of Malaysia announced that it would lower the average electricity tariff in Peninsular Malaysia by 2.25 sen/kWh effective on 1 Mar in light of the lower generation costs from the decline in overall fuel costs. The decrease implies a reduction of 5.8% from the existing average tariff of 38.5 sen/kWh to 36.3 sen/kWh. The 2.25 sen/kWh was derived from a total savings (from lower fuel costs) of RM727m, based on the government's statement. The government also promised that there would not be a tariff hike in Jun-Dec 2015.
What We Think
The announcement was not a surprise as past media reports stated that Tenaga could face tariff reduction due to the favourable fuel cost conditions currently. We have also highlighted in our previous reports that a tariff reduction is likely, given the more positive fuel cost outlook for Tenaga. However, we expected the tariff reduction to be announced in Jun 2015 during the review for the next period (Jun-Dec 2015) under the fuel cost pass-through (FCPT) mechanism. The lower tariff was mainly due to the lower coal prices and expectation that Tenaga's coal generation would improve as a result of: 1) the recovery in output of coal power plants, and 2) the commencement of Manjung 4, which would increase Tenaga's coal capacity. We are not making any changes to our FY15-16 EPS forecasts yet as there is still uncertainty about details such as Tenaga's base price for its fuel (coal, gas, LNG).
What You Should Do
We think that investors should take advantage of this is good buying opportunity for Tenaga, as the tariff reduction indicates that the company expects its 2015 fuel cost outlook to be stable. Furthermore, the tariff reduction lends credibility to the fuel cost pass-through (FCPT) mechanism in the eyes of the public. We maintain our Add call on the stock, with an unchanged target price of RM18.42.
Source: CIMB Daybreak - 12 February 2015
Target RM18.42 (Stock Rating: ADD)
We believe that the government’s announcement on the tariff reduction today is positive, as it would allow Tenaga's FCPT mechanism to gain public credibility. This gives us comfort that future tariff movements are likely to proceed more smoothly than in the past. On the tariff reduction itself, the market had a kneejerk reaction yesterday which presents a good opportunity to accumulate the stock. Tenaga remains an Add, with an unchanged target price of RM18.42.
What Happened
Today, the government of Malaysia announced that it would lower the average electricity tariff in Peninsular Malaysia by 2.25 sen/kWh effective on 1 Mar in light of the lower generation costs from the decline in overall fuel costs. The decrease implies a reduction of 5.8% from the existing average tariff of 38.5 sen/kWh to 36.3 sen/kWh. The 2.25 sen/kWh was derived from a total savings (from lower fuel costs) of RM727m, based on the government's statement. The government also promised that there would not be a tariff hike in Jun-Dec 2015.
What We Think
The announcement was not a surprise as past media reports stated that Tenaga could face tariff reduction due to the favourable fuel cost conditions currently. We have also highlighted in our previous reports that a tariff reduction is likely, given the more positive fuel cost outlook for Tenaga. However, we expected the tariff reduction to be announced in Jun 2015 during the review for the next period (Jun-Dec 2015) under the fuel cost pass-through (FCPT) mechanism. The lower tariff was mainly due to the lower coal prices and expectation that Tenaga's coal generation would improve as a result of: 1) the recovery in output of coal power plants, and 2) the commencement of Manjung 4, which would increase Tenaga's coal capacity. We are not making any changes to our FY15-16 EPS forecasts yet as there is still uncertainty about details such as Tenaga's base price for its fuel (coal, gas, LNG).
What You Should Do
We think that investors should take advantage of this is good buying opportunity for Tenaga, as the tariff reduction indicates that the company expects its 2015 fuel cost outlook to be stable. Furthermore, the tariff reduction lends credibility to the fuel cost pass-through (FCPT) mechanism in the eyes of the public. We maintain our Add call on the stock, with an unchanged target price of RM18.42.
Source: CIMB Daybreak - 12 February 2015
