TENAGA (5347) - Tenaga Nasional - Tariff reduction possible
Target RM18.42 (Stock Rating: ADD)
Tenaga's tariff rates could be reduced in the next review period of Jun 2015, The Star newspaper reported at the weekend. While a tariff hike is already unlikely, Tenaga's fuel costs currently imply that a tariff reduction is merited, as per the aims of the fuel cost pass-through mechanism. Whether or not there is a tariff hike, we think Tenaga's earnings would benefit from the improved coal utilisation. We thus maintain both our target price based on 15x FY16 P/E of RM18.42 and our Add call.
What Happened
An article in The Star newspaper at the weekend has suggested the possibility of a tariff reduction given the improved generation mix favouring more coal and lower coal prices. The article quoted unnamed sources as saying that Tenaga's coal mix would further increase when its 1,000MW Manjung 4 capacity comes on stream in Mar, adding that there is a possibility of the government revising the tariff downwards in view of the lower costs incurred by power-generating companies on the back of the improved generation mix and substantial declines in coal prices. The last revision of the tariff was made in Jan 2014, when it was increased 15% to 38.5/kWh. The expectation is that there could be a tariff reduction when the review is done in Jun 2015.
What We Think
We had previously highlighted that for the 1Q15, Tenaga's earnings would include an over-recovery of fuel costs of RM200m, which imply that its fuel costs are lower-than-expected. As per the fuel cost pass-through (FCPT) mechanism, this amount should be returned to consumers via a tariff reduction. As such, a tariff cut in the next review period of Jun 2015 is not such a far-fetched idea. However, as Tenaga's management has highlighted, it is up to the government to decide on whether this happens. We note that for 2Q15 onwards, Tenaga's coal utilisation will continue to rise, barring any unexpected incidences that would cause issues with its current coal capacity. The increasing coal utilisation will see it take advantage of the current low coal prices, which, as at 1Q15, was around US$70/MT or about 20% below what it expected during the last tariff review.
What You Should Do
We think Tenaga's share price will reflect its positive earnings outlook, underpinned by the lower fuel costs. We thus maintain our Add rating on the stock, with an unchanged target price of RM18.42.
Source: CIMB Daybreak - 26 January 2015
Target RM18.42 (Stock Rating: ADD)
Tenaga's tariff rates could be reduced in the next review period of Jun 2015, The Star newspaper reported at the weekend. While a tariff hike is already unlikely, Tenaga's fuel costs currently imply that a tariff reduction is merited, as per the aims of the fuel cost pass-through mechanism. Whether or not there is a tariff hike, we think Tenaga's earnings would benefit from the improved coal utilisation. We thus maintain both our target price based on 15x FY16 P/E of RM18.42 and our Add call.
What Happened
An article in The Star newspaper at the weekend has suggested the possibility of a tariff reduction given the improved generation mix favouring more coal and lower coal prices. The article quoted unnamed sources as saying that Tenaga's coal mix would further increase when its 1,000MW Manjung 4 capacity comes on stream in Mar, adding that there is a possibility of the government revising the tariff downwards in view of the lower costs incurred by power-generating companies on the back of the improved generation mix and substantial declines in coal prices. The last revision of the tariff was made in Jan 2014, when it was increased 15% to 38.5/kWh. The expectation is that there could be a tariff reduction when the review is done in Jun 2015.
What We Think
We had previously highlighted that for the 1Q15, Tenaga's earnings would include an over-recovery of fuel costs of RM200m, which imply that its fuel costs are lower-than-expected. As per the fuel cost pass-through (FCPT) mechanism, this amount should be returned to consumers via a tariff reduction. As such, a tariff cut in the next review period of Jun 2015 is not such a far-fetched idea. However, as Tenaga's management has highlighted, it is up to the government to decide on whether this happens. We note that for 2Q15 onwards, Tenaga's coal utilisation will continue to rise, barring any unexpected incidences that would cause issues with its current coal capacity. The increasing coal utilisation will see it take advantage of the current low coal prices, which, as at 1Q15, was around US$70/MT or about 20% below what it expected during the last tariff review.
What You Should Do
We think Tenaga's share price will reflect its positive earnings outlook, underpinned by the lower fuel costs. We thus maintain our Add rating on the stock, with an unchanged target price of RM18.42.
Source: CIMB Daybreak - 26 January 2015
