RP3 delay, ICPT surcharge, potential rebates to impact Tenaga’s prospects

AT a glance, Tenaga Nasional Bhd is staring at potential earnings risk from less favourable Regulatory Period 3 (RP3) parameters/imbalance cost pass-through (ICPT) mechanism and possible additional contribution for electricity rebates in order to ease the people’s burden.

This is despite the utility giant’s higher asset base could potentially mitigate lower regulated return which would adversely affect its earnings during the RP3.

Such development has prompted CGS-CIMB Research to forecast a 30-basis point (bp) cut in regulated return and 3% regulated asset base (RAB) annual growth for the RP3 (FY2022-2024F).

To re-cap, the Energy Commission (EC) has decided to extend Regulatory Period 2 (RP2) for the second time “until further notice” with all parameters of incentive-based regulation unchanged.

RP2 which expired in 2020 had been already extended for one year until end-2021. Essentially, RP is a mechanism that decides the rate of return of TNB’s capex (capital expenditure).

“We gather that the RP3 paper was ready and awaiting approval from the cabinet which will be revisited after the flood situation has eased,” analyst Ngo Siew Teng pointed out in a company update.

“The higher fuel costs for the period of July-December 2021 will likely be borne by the Government and the Kumpulan Wang Industri Elektrik (KWIE) fund.”

The regulated return for RP2 extension (2021) was 7.3% with an expected closing RAB of RM62.4 bil, according to CGS-CIMB Research.

Against such backdrop, the research house has revised TNB’s target price downward to RM10.88 (from RM13.60 previously) after applying a 20% discount to its five-year historical P/E (price-to-earnings ratio) of 15 times to factor in the regulatory risks.

Nevertheless, the research house reiterated its “add” rating on the company given its undemanding valuation and decent dividend yield of more than 5%.

The uncertainties surrounding RP3 have likely hampered buying interest in TNB with its stock price currently hovering near the 52-week low of RM9. The company’s three major shareholders are Khazanah Nasional Bhd (25.6%), the Employees Provident Fund (EPF) (16.2%) and Amanah Saham Nasional (15.1%).

At 11am, TNB was down 5 sen or 0.55 % to RM9.05 with 1.477 million shares traded, thus valuing the company at RM51.82 bil. – Jan 14, 202

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