MIDF upgrades TNB call to ‘buy’ over continued ICPT mechanism

KUALA LUMPUR – MIDF Research has upgraded its call on Tenaga Nasional Bhd (TNB) from “neutral” to “buy” over the utility’s positive outlook after the government approved the continued implementation of the imbalance cost pass-through (ICPT) mechanism for the January 1-June 30, 2023 period.

The research house said the Energy Commission’s latest ICPT review points to an incrementally positive outcome for TNB, given a significantly higher pass-through allowed relative to the actual ICPT under-recovery of 27 sen per kilowatt-hour (kWh).

“Our new target price (TP) of RM10 for TNB takes into account the improved earnings and cash-flow outlook, coupled with a reduction in risk premium,” it said in a note today.

This is due to, among others, better clarity on how TNB’s elevated ICPT receivables will be managed going forward, and the ICPT surcharge for medium and high voltage non-domestic consumers is being raised from 3.7 sen per kWh previously to 20 sen per kWh, raising the effective tariff for this group of consumers by 37%.

“The (government’s) current emphasis on targeted subsidies signals a more direct approach to ICPT pass-through going forward rather than reliance on the government’s willingness to subsidise,” it said.

Meanwhile, CGS-CIMB Research has reiterated its “add” call for TNB with its TP remaining at RM13.60, noting that the power company will likely keep its monopoly position in the electricity transmission and distribution segment.

It said TNB also has a decent dividend yield of more than 5% for financial years 2022 to 2024 and is poised to benefit from Malaysia’s energy transition, additional grid investments, and renewable energy opportunities which could boost its earnings and improve its image in terms of environmental, social and governance.

On the other hand, Maybank Investment Bank Bhd has maintained its “hold” call for TNB due to rising coal prices, which means that ICPT concerns could resurface again in six months.

“Nevertheless, we believe ICPT concerns would gradually reduce with each successful round of pass-through,” it said, maintaining its TP at RM8.70.

“Overall, the tariff schedule for the first half of 2023 reflects the new government’s preference for targeted subsidies,” the bank said. – Bernama, December 19, 2022