Diversion from IBR, ICPT likely to be negative for TNB

KOTA KINABALU: A diversion from the Incentive Based Regulation (IBR) and Imbalance Cost Pass-Through (ICPT) have been projected by analysts to reintroduce uncertainty to the system, and is likely to be negative for Tenaga Nasional Bhd’s (TNB) share price and the sector.

According to Affin Hwang Investment Bank Bhd (Affin Hwang), there have been calls by a few parties pleading for the government to absorb the recent tariff hike from both domestic and non-domestic users.

Affin Hwang believed that flip-flopping on the issue would have long lasting impact on TNB, due to the uncertainty in both the policy and the framework used to determine the tariff.

“TNB will no doubt be negatively impacted by the decision, as the risk premium associated to its stock and bond are likely to increase,” the research firm said.

“Lower profitability (higher interest cost) and being less competitive (higher WACC) are some of the negative implications that are associated with the higher risk premium in the long-run.”

Affin Hwang projected that there could also be downside risk to earnings, should TNB be asked to share the incremental fuel cost of RM698 million for the second half of 2018 (2H18), despite only close to half of the group’s profit being generated from the D&T segment.

As a result, the research firm believed TNB’s share price could revert to the RM7-RM10 stock price range, namely before the implementation of IBR and ICPT in 2014.

“Alternatively, there are a few options that the government could explore to alleviate the surcharge, like lowering the natural gas price supplied to the power sector or renegotiate for a capacity payment with the independent power producers (IPPs) and TNB.”

All in, Affin Hwang maintained its ‘buy’ call on the stock, with an unchanged discounted cash flow (DCF)based target price of RM18.70 per share.

“In our view, the government is likely to maintain the current ICPT mechanism, and the increase in fuel cost will continue to be earnings neutral to Tenaga, supporting its current payout.

“Tenaga is also our preferred pick for the sector, and one of Malaysia’s Top Buy ideas.”