To recap, the 2023 utilities budget of approximately RM1.3bn for the sector was not much different from the preceding year. The budget continued to prioritize Sabah and Sarawak as primary recipients of utility improvements, with a strong emphasis on enhancing the road network, access to clean water, and electricity supply.
The recent midterm review and enhancement of the 12th Malaysia Plan (2021 – 2025) also focused on the development of Sabah and Sarawak, with RM195mn allocated for projects on Renewable Energy (RE) development and upgrading of the electricity supply system at Gugusan Felda Sahabat Sabah. Apart from that, government also plans to enact climate change laws to regulate the implementation of initiatives to achieve the nation's climate change goals, and restructure the electricity, diesel and petrol subsidies, and other social assistance with prioritizing the needs of the less fortunate.
Notwithstanding, we are positive with the latest announcement of RM27bn investment by the government in National Energy Transition Roadmap (NETR) which outlines aspirations for Malaysia to achieve net zero emissions by 2050. The NETR Part 1 (RM25bn investment) focused on six key energy transition levers which are i) energy efficiency, ii) renewable energy, iii) hydrogen, iv) bioenergy, v) green mobility, and vi) carbon capture, utilization, and storage (CCUS). From there, about ten flagship catalyst projects were identified to navigate the shift from traditional fossil fuels to high value sustainable economies. Whereas, Part 2 (RM2bn of seed fund) elaborate on all levers from NETR Part 1. The plan proposed implementation of an energy service companies (ESCO) platform, establishment of solar parks, development of Third-Party Access (TPA) framework, RE exchange hub for cross border RE trading, hydrogen hub, facilitating biomass clustering, imposition of landfill tax, and introduction of regulation and formulation of carbon pricing instrument for CCUS project.
According to the Malaysian Solar Industry Association (MSIA), Malaysia needs 2.5GW of RE installation per year to achieve 70% of RE in the power mix by 2050. Hence, we believe government will provide more allocation and introduce new measures to utilities sector in Budget 2024. This includes 1) allocation of resources to realise the NETR plan, 2) more tax allowance/exemption on RE usage, and 3) announcement of new capacity quota to gradually incorporate RE mix into purely existing fossil fuel plant based. We also expect a 4) robust investment in the solar segment as it is the only viable option, while other forms of RE are still in nascent stages of development. On that note, we foresee Engineering, Procurement, Construction and Commissioning (EPCC) solar player and TENAGA as the biggest beneficiary from rapid growth in RE capacity; the former will benefit from expansion in construction orderbook whilst the latter to benefit from expansion in regulated asset based (RAB) from investment in the grid. To note, RE supply in Malaysia presently stood at 25% and are on the right track with the nation’s target of 31% of RE by 2025 and 40% by 2040.
Pending the 2024 Budget announcement, we remain our NEUTRAL recommendation at this juncture. Reiterate a BUY call recommendation on TENAGA (TP:RM12.12) and HOLD call on Gas Malaysia (TP:RM3.40), Petronas Gas (TP: RM15.98) and Malakoff (TP:RM0.62).
Source: BIMB Securities Research - 4 Oct 2023
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