As the Prime Minister made the preliminary indications on the electricity tariff decision which is scheduled to be announced towards end-December, there were two key parts to the announcement: A tariff hike for the ‘giant companies’ such as multinational exporters, Unchanged tariffs for SMEs and domestic consumers (possibly via similar electricity subsidy employed in the past).
On initial thoughts, MIDF views the decision looks to allow some pass-through of Tenaga’s elevated ICPT receivables through selective non-domestic consumers. However, the definition of ‘giant companies’ is still sketchy to determine if these consumers account for a large proportion of demand.
Nonetheless, the decision should bring cheer to domestic consumers and SMEs in the non-domestic sector as tariffs are expected to remain the status quo. This should also alleviate concerns about domestic inflationary pressure had the Government gone ahead with a blanket tariff hike. Overhang largely remains for now. The second part of the announcement suggests that Tenaga may still rely on subsidy payments from the Government (which is essentially paid on behalf of electricity consumers) to recoup its ICPT under-recovery.
A key detail to look out for is the timing and magnitude of these subsidy payments as this will critically determine the peak in Tenaga’s ICPT receivables trend and the resultant cash flow constraint. Deferment of the Government’s decision on Tenaga’s remaining ICPT payment had been an overhanging issue – Tenaga’s ICPT receivables stood at RM12.1b as at end-1H22, of which RM5.8b was subsidised by the Government, an estimated RM1.6b collected via a 3sen/kwh surcharge for the non-domestic sector, while a decision on dealing with the remaining amount was deferred. By year-end, Tenaga is expected to see its ICPT receivables rise to RM16.4b, translating to an estimated ICPT surcharge of 27sen/kwh if passed through over the next 6 months, or a 68% increase vs. base tariff of 39.95sen/kwh.
MIDF keeps its NEUTRAL call on the power sector. At this point, it views the announcement as a mild positive for Tenaga (NEUTRAL, TP: RM8.45) as the decision will at least allow some direct cost pass-through via the ‘giant’ companies,
which gives slightly better clarity on Tenaga’s cash flow prospects. For now, however, the house prefer exposure to IPPs which entail better cash flow certainty and Liberalised electricity markets given better ability to pass through higher fuel cost.
Top sector picks are YTL Power (BUY, TP: RM1.03) and Ranhill Utilities (BUY, TP: RM0.67).
