TNB hits high on possible FCPT implementation

by **Cals** Fri 25 Oct 2013, 12:54

Business & Markets 2013

Written by Kamarul Anwar of theedgemalaysia.com

Friday, 25 October 2013 10:23

KUALA LUMPUR: Shares of Tenaga Nasional Bhd (TNB) hit a 19-year high yesterday to close at RM9.50, owing to a pre-budget rally expectation that the government will announce today the implementation of a mechanism that will allow the utility giant to pass on its fuel cost to consumers.

TNB stock rose 14 sen or 1.5% at close yesterday. A total of 16.89 million shares changed hands at RM9.39 to RM9.53 apiece.

The counter has never closed higher than that, save for March 4, 1994, at RM9.638.

According to Bloomberg data, 21 out of 25 analysts recommended TNB as a “buy” while the rest had “hold” calls. The average 12-month target price was RM10.59.

An analyst told The Edge Financial Daily that investors expect Budget 2014, which will be tabled in Parliament today, will see Prime Minister Datuk Seri Najib Razak introducing the Fuel Cost Pass-Through (FCPT) mechanism.

“There has been speculation that the government will finally announce the FCPT, which many see will benefit TNB,” said the analyst.

However, an analyst said it is still unknown how the FCPT mechanism will affect TNB’s profitability, let alone the quantum of difference that the mechanism can boost or erode the earnings.

“If anything, the FCPT will help TNB get more stable earnings going forward,” the analyst said.

The FCPT mechanism has been discussed as recently as July, when Deputy Minister of Energy, Green Technology and Water Datuk Seri Mahdzir Khalid said the Energy Commission was in the midst of determining the electricity tariffs based on the incentive-based regulation.

This was done to encourage more efficient utility operations through an incentive and penalty system to reduce operational costs.

The government, which has been pressured by its ballooning budget due to an increase in subsidy cost, is seeking to trim its fiscal deficit to 3% of the GDP by 2015. Last year’s fiscal deficit stood at 4.5% of the GDP.

“[The FCPT mechanism] is not to boost TNB’s earnings. However, this could help the group minimise its earnings’ downside risks,” the analyst said.

The analyst explained that in the case of another round of acute gas supply shortage like in 2011 or TNB requiring a higher amount of natural gas from the current amount, the group will be relieved from absorbing the brunt of the cost.

According to RHB Research Institute analyst Kong Heng Siong, an increase of RM3 per million British thermal unit in natural gas price could push down TNB’s earnings by 26.8% to 31.1%.

“Taking into account the magnitude involved, we believe the government will have to compensate TNB for the additional fuel costs incurred. Hence, we expect the government to implement the FCPT formula come 2014, albeit on a staggered basis,” he said in a recent report.

AmResearch Sdn Bhd analyst Alex Goh wrote in a note yesterday that TNB will not be liable for the damages in the flood disaster in Bertam Valley, Cameron Highlands.

“This is because TNB had followed the prescribed fixed procedures, including raising the alarm sirens and liaising with the security/local authorities, the head of the village security and the development committee before undertaking the controlled release of water,” he explained.

This article first appeared in The Edge Financial Daily, on October 25, 2013.