• Overall, 2Q19 performance for companies under our coverage saw no major surprises with 3 (Tenaga, PetGas and GasM) coming within expectations and 1 (Malakoff) slightly ahead.

• During the period, we made earnings changes to Tenaga (updating forecasts for MFRS16) and PetGas (minor housekeeping and higher effective tax rate per management guidance).

• We see potential upside to our estimates for Malakoff as TBE/TB4 performed well but by lower energy payment for its battery of gas-fired power plants, with the successful commissioning of Jimah East Unit 1, could offset the gains.

• MESTECC is expected to provide the findings from MESI 2.0 sometime in early Sept 2020. Notwithstanding, both the esteemed minister and Tenaga’s senior management noted that changes would not be overly disruptive to Tenaga’s existing business model.

• While outlook for the sector is remotely exciting, we believe it also implies an increasingly rare and valuable attribute especially among the big cap stocks: defensive earnings. Retain Overweight

The half that was

The Utilities sector saw fairly subdued share price performance in 1H19 with the best performer being only Malakoff (Chart 1 & 2). The big caps (Tenaga and PetGas) performed dismally; the latter largely reflects weaker earnings expected in 2019 saw heavy selldown in early trades ahead of its results release and has yet to recover despite matching 1H18 DPS. Meanwhile, Tenaga’s share price trailed the CI for most of 1H on concerns over potential reforms post-MESI 2.0 before recovering at endMay, post-1Q19 results.

A fairly mundane 2Q19 with exception of PetGas

Relative to our estimates, the sector’s 2Q19/1H19 fared well though we can sum up the performance as pedestrian. Tenaga, PetGas and GasM 1H19 earnings were within estimates while Malakoff’s was slightly ahead owing to sustained uptime at TBE/TB4 and lower-than-expected MI charge off. PetGas’ earnings was noteworthy vis-à-vis the share price rout (read: market expectations) ahead of its results; the GP unit saw structural margin expansion while Utilities also did well, mitigating earnings weakness.

Outlook: weaker 2H19 but priced in

We generally expect weaker earnings for the sector in 2H19 stemming from Tenaga (as more MFRS16 adjustments dialled in) and, possibly, Malakoff (lower dispatch by the gas-fired plants). GasM should see some reprieve in margins following the underrecovery in 1H19 portends to higher tariff in the latter half of 2019. PetGas should see 1H19 momentum sustained with possible upside from the GP and Utilities segments.

Stay OVERWEIGHT; all set for industry reform

We are Overweight on the sector as the 1H19 share price weakness has more than priced in earnings risks, in our view. Changes from MESI 2.0 would likely not be too disruptive to Tenaga’s existing business model while ongoing reorg portends to possible value unlocking of GenCo. PetGas could offer better-than-expected earnings stability, making the stock a compelling defensive play ahead of uncertainties.

Source: BIMB Securities Research - 4 Sept 2019