TNB remains top stock pick in power sector
KUALA LUMPUR: Tenaga Nasional Bhd (TNB) remains Kenanga Research’s top pick in the power sector, with a target price of RM17.17.
The firm said a higher base tariff of 39.45 sen per kiloWatt hour (kWh) for Regulatory Period 2 (RP2) of 2018 to 2020, confirmed by the Energy Commission on Tuesday, remains earnings neutral to TNB.
“To our surprise, the new base tariff was raised to 39.45 sen/kWh in RP2 from 38.53 sen/kWh previously for Regulatory Period 1 (RP1) of 2015 to 2017. This is contrary to TNB’s announcement last month that the tariff structure would be maintained in RP2.
Kenanga Research, however, said the new base tariff would not affect TNB’s profitability as fuel costs are passed through to endusers under the Imbalance Cost Pass-through (ICPT) mechanism. It said given the limited funds available, such as PPA Saving Fund, to offset subsidies, the question remains on whether the government would allow TNB to raise tariff rates in the future should the ICPT rebate situation persist.
The total subsidy of RM929 million to maintain a tariff of 38.53 sen/kWh from this month to June will be borne by TNB.
Nonetheless, in the principle of ICPT framework, fuel cost risk is passed through to end-consumers, thus it is neutral impact on TNB’s earnings, said Kenanga.
“We continue to like TNB for its earnings quality while RP2 offers better earnings clarity which was reflected in the recent strong accumulation of the stock.
“With its heavy index-weighted status, we believe it is still undervalued at current price earnings ratio of 13 times,” said the firm.