Government’s decision to maintain current IBR, ICPT positive for TNB
KUCHING: The Government’s decision to maintain the current (incentive-based regulation) and imbalance cost pass-through ( ICPT) framework has been viewed as a positive development for Tenaga Nasional Bhd (TNB).
In a filing on Bursa Malaysia last Friday, TNB had announced that the Government has approved, via a letter from the Energy Commission dated June 28, 2018, the continued implementation of ICPT for the period of July 1 to December 31, 2018.
TNB revealed that the average Base Tariff remained unchanged at 39.45 sen per kilowatt hour ( kWh) and due to higher fuel and generation costs for the period of January 1 to June 30, 2018, the additional cost of RM698.19 million or 1.35 sen per kWh ICPT surcharge, will be pass-through via the ICPT mechanism.
Meanwhile, the group highlighted that domestic customers with monthly consumption below 300kWh will not be affected by this ICPT implementation.
“For domestic customers with monthly consumption above 300kWh, the ICPT surcharge will be funded by Kumpulan Wang Industri Elektrik ( KWIE),” the group said.
For non- domestic customers, an ICPT surcharge of 1.35 sen per kWh will be applicable.
In Affin Hwang Investment Bank Bhd’s (Affin Hwang) view, the government’s decision to maintain the current IBR and ICPT framework for RP2 to determine the tariff every six months until 2020 is positive for TNB as it reinforces the idea that any changes to the fuel price will continue to be earnings neutral to the group.
“The hike in the current effective tariff is the steepest since the introduction of the ICPT in 2014, and this is also the first time that a surcharge is being collected,” the research firm said.
“The current rebate enjoyed by all users will also be abolished. We believe that this is a strong signal that there is only limited political influence in determining the tariff.”
The research arm of Kenanga Investment Bank Bhd ( Kenanga Research) also viewed this development as highly positive for TNB as it shows the utility is able to pass through higher fuel costs to consumer albeit the domestic segment remains subsidised.
Affin Hwang observed that before the announcement of the tariff, TNB’s share price had corrected by more than 13 per cent over the past two months, mainly due to the uncertainty over the policy.
According to Kenanga Research, shares of TNB took a beating after the Pakatan Harapan ( PH) coalition took over as federal government, resulting in the group’s share price hitting a new low last week, down by 17 per cent from its 52-week high.
“There were concerns affecting investors’ perception of it having to share government’s ‘burden’ on financing the power supply to the public and the populist policy of the PH government could work against the principle of ICPT mechanism.
“However, with this first surcharge of 1.35 sen per kWh, it could indicate that the PH government allows hike if it is not directly charged to the public.
“We learnt that the subsidy portion of the RM698.19 million additional cost is circa RM100 million for domestic customers,” the research arm said.
With fund available of RM1.5 billion under KWIE as of early of the year, Kenanga Research believed the fund was sufficient to offset any higher cost for many years should cost remain at the first half of 2018 (1H18) levels.
“The ICPT mechanism is important to TNB, as it helps to maintain a steady cash flow for TNB, which allows TNB to continue with its current dividend payout policy - at least 30 to 60 per cent of its net profit to be returned to shareholders as dividends.
“With the uncertainty removed, the risk associated to TNB is also now lower, which we believe will act as a catalyst for the stock,” Affin Hwang said.