UTILITIES SECTOR

UOB KayHian Research expects the government to announce a base rate hike and a tariff rebate by the end of this month.

The research house said it expects the outcome of the tariff announcement slated for year-end on the Regulatory Period 2 (RP2) and first half 2018 imbalance-cost-passthrough (ICPT) review to favour Tenaga Nasional Bhd (TNB).

It said its channel checks suggested that there will be a base rate hike, and that TNB’s allowable returns could be slashed by a nominal 0.2%-0.5% against market expectations of a drastic 1% cut.

It also expects a 1% to 2% inflation adjustment, potentially lifting TNB’s FY18-FY20 net profit by 5%.

The research house expects the government to offer a rebate in the 2018 ICPT review.

“In the lead-up to the general election, the government may want to maintain electricity tariffs, which are seen as a highly sensitive political tool,” it said.

While it expects the base tariff to rise in Jan 18, the research house said its calculations suggest that the government could offer a rebate to maintain current electricity tariffs.

“TNB is poised to maintain its cash flow prowess under RP2 with a relatively stable net profit outlook,” it said.

It projects FY18, FY19 and FY20 net profits of RM7.7bil, RM7.1bil, and RM7.3bil respectively for TNB with a potential upside if the RP2 inflation adjustment is between 1% and 2%.

“We like the stock for its good earnings visibility, undemanding valuation and sustainable net dividend yield of approximately 5%,” it said.

On its outlook for independent power producers, the research house continues to like YTL Power International for its long-term prospects and upgraded Malakoff Corp to Buy from Hold as it is likely to clinch a power purchase agreement for a new power plant.