• We expect the sector to steer calmer waters in 2019 as expectations have adjusted with adoptions of new IBR guidelines for MESI and the gas supply chain inches closer to full TPA rollout as PetGas is now under the IBR purview.

• With valuation of regulated assets under GT being set at cost is negative for PetGas, the transition is over two regulatory periods (ie. RP1: 2020-2022 and RP2: 2023-2025), implying a soft-landing to earnings, ceteris paribus.

• Notwithstanding, we Overweight the sector; in line with our house view which see limited catalysts elsewhere amid the easing global and domestic economic growths. The sector’s defensive attributes is a beacon of safe haven.

• Our picks are Tenaga (TP: RM14.60) and Gas Malaysia (TP: RM3.30) while we are neutral on Petronas Gas (TP: RM17.60) over concerns of its longer term prospects. Malakoff (TP: RM0.82) share price might see limited downside but lacks catalysts too while dividend yields appear attractive.

Expectations adjusted

The sector’s market value for the latter part of 2H18 shed some 13% (Chart 1). In absolute terms Tenaga and Malakoff were the biggest losers as earnings were impacted by regulatory tweaks and operational setbacks, respectively, while PetGas bucked the trend (Chart 2). Relative to its historical trading band, the sector currently trades above mean, at c.1 sigma. Meanwhile, the sector currently trails both the KLCI and Hijrah Shariah Index on YTD basis possibly due to the market still on a risk-on mode as flashes of macro data points toward pockets of growth.

Discounted defensives

We expect the sector’s earnings visibility to improve, albeit uninspiring. In our view, the Regulatory Implementation Guidelines (RIG) recently firmed up for the Electricity sector is a bellwether for other entities under the IBR Framework. On the flipside, the flat, uninspiring outlook is ‘insured’ by the framework. This would be appealing as risk appetite wavers and market turns defensive amidst uncertain domestic and global economic growth. More so within the Shariah universe in which our house see limited earnings catalyst in sectors such as Plantations, Construction, Healthcare and Property; the positives are on select stocks within F&B/Consumer, Oil & Gas and Telco sectors. We also note that valuations for these stocks are at a premium to the Utilities sector. On absolute dividend payout basis, the Utilities sector also offers one of the most generous dividends and at pure cash to boot (Table 1 and 2).

Overweight Utilities ahead of growth uncertainties

We Overweight the Utilities sector with Tenaga (TP: RM14.60) and Gas Malaysia (TP: RM3.30) being our stock picks. We are neutral on PetGas (TP: RM17.60); new tariffs for the Transportation (GT) and Regasification Terminal (RGT) businesses shed light on earnings impact under IBR, which is negative, but better-than-expected in our view. Effect from asset valuation transition would be increasingly material from 2021F onwards. We see limited risk to Malakoff (TP: RM0.82) share price, assuming TB4 remains stable, but earnings catalyst is equally sparse. Still, dividend yields are hard to ignore; we are cautious over the Alam Flora purchase due to limited earnings accretion and uncertainty in Federal government’s solid waste management policy.

Source: BIMB Securities Research - 13 Feb 2019