KUALA LUMPUR: Hong Leong Investment Bank (HLIB) Research is maintaining its Buy call on Tenaga Nasional with an unchanged target price of TP of RM17 based on the discounted cash flow (DCF) estimated.
The research house said on Monday it remains positive on Tenaga Nasional’s long term growth and strong cash flow.
“Shareholders stand to receive higher dividend yields of up to 5% (vs. historical 2%-3%) based on the updated dividend payout policy (30%-50% of net income),” it said.
Last Friday, the government announced the continuation of tariff rebate of 1.52sen/kWh for 2H17 (vs. 1.52sen/kWh in 2016 and 1H17) in Peninsular Malaysia, despite the increase in fuel energy costs, as the government will bear the cost differential of RM1.3bil.
Of the RM1.3bil, it said RM523.23m was for higher fuel energy costs in 1H17 due to rising global coal price, ringgit depreciation and hike in piped gas price from RM21.20/mmbtu to RM22.70/mmbtu effective 1 July 2017.
The remaining RM780mil was for the cost to maintain the current tariff rebate of 1.52sen/kWh in 2H17.
The government will fund the amount of RM1.3bil by utilising the Power Purchase Agreements (PPA) Saving Fund (amounting to RM1.5bil-RM1.8bil), the accumulated savings from the renegotiation of PPAs with the first generation independent power producers.
“We are neutral on the tariff rebate announcement, as Tenaga will get compensation of RM1.3bil from the government in order to cover its higher energy fuel costs under Imbalance Cost Past Through (ICPT) mechanism," it said.
HLIB Research said he announcement will allay investors’ concerns on government’s commitment in honouring IBR and ICPT mechanisms even in the event of high fuel costs.
“The actual tariff rate is supposed to be 39.55sen/kWh (vs. benchmark 38.53sen/kWh) due to the rising fuel costs. However, the government has decided to maintain the tariff at 37.01sen/kWh and bear the differential of 2.54sen/kWh (amounting to RM1.3bil in total costs).
“At current juncture, coal price and the ringgit rave both been relatively stable, relieving concerns on further increase in coal fuel costs. However, gas price is expected to be hiked further by RM1.50/mmbtu for every 6 months until market price of RM26/mmbtu is matched.
HLIB Research said Tenaga’s earnings and cash flow are expected to be stable due to the implementation of the IBR/FCPT mechanisms.
It said the expected IBR revision to lower return on regulated assets by 2018 will be offset by new contributions from associates and power plants. Shareholders also stand to benefit from higher dividend payout.
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