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Nikkei Markets

Tenaga Nasional shares jump on tariff plan revision

Stock surged after Malaysia approved power surcharge for non-residential users

KUALA LUMPUR (Nikkei Markets) -- Malaysia agreed to raise electricity tariff for non-household users for the second half of this year, a move that helped lift shares of the largest electric utility Tenaga Nasional Friday by as much as 10%, their biggest single-day gain in a decade.

The government approved a surcharge of 1.35 sen per kilowatt-hour for the next six months for non-residential customers to help state-run Tenaga offset rising costs. Fuel and generation costs rose by 698.19 million ringgit ($172.94 million) in the first six months, Tenaga said in an exchange filing.

However, the tariff for users with monthly consumption below 300kWh, which represents more than 60% of its household customers, will remain unchanged until year-end, Tenaga said. "The impact is neutral on TNB and will not have any effect to its business operations and financial position."

Still, analysts said the news will put an end to a major uncertainty surrounding Tenaga's prospects amid concerns that the co-called Imbalance Cost Pass-Through and Incentive-Based Regulation mechanisms could be shelved following a shock electoral defeat of the previous administration in May.

"The announcement will allay concerns on the new government's commitment in honoring the IBR and ICPT mechanisms," said Hong Leong Investment Bank's analyst Daniel Wong. He kept a Buy call on the stock with a target of 17.50 ringgit, implying nearly 20% gain over next one year from the current price. Shares of Tenaga ended Friday 7.2% higher at 14.64 ringgit, while the benchmark FTSE Bursa Malaysia KLCI gained 1.6%.

Under the ICPT mechanism, Tenaga could reflect changes in fuel and other power generation-related cost every six months. The latest adjustment is the first time a surcharge has been applied since the mechanism was introduced in 2014. Previous adjustments were rebates.

The IBR meanwhile is a tariff-setting framework that reviews the base tariff every regulatory period lasting three years. The current regulatory period began in January 2018 and the average base tariff remains unchanged at 39.45 sen per kilowatt-hour.

Tenaga Nasional's domestic power plants are mainly fuelled by natural gas and coal. Natural gas accounts for about 47% of Tenaga Nasional's generation capacity. Coal, mostly purchased from Indonesia and Australia, makes up about 42%, while hydel power accounts for the remainder.

"It does show that the government has the political will to raise electricity tariffs, at least for the non-domestic sector," said AmInvestment Bank's analyst Joshua Ng. "The development will reduce the perceived regulatory risk and hence, risk premium of Tenaga."

Malaysia is home to the world's largest rubber glove producers in terms of volume, led by Top Glove and Hartalega Holdings, which uses natural gas as feed stock. Energy costs typically account for between 10% and 12% of total costs for the major manufacturers.

"Given the growing global demand for gloves and the industry's intact cost pass-through pricing mechanism, we expect energy increases to have a minimum adverse impact on glove manufacturers' earnings moving forward," said KAF-Seagroatt & Campbell Securities analyst Cheryl Tan.

--Chong Sin Hao and Jason Ng

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