• The corporate earnings season for the 4Q23 yielded mixed results with Gas Malaysia (GMB) and Petronas Gas (PetGas) reporting results inline with our expectations, excluding TENAGA and Malakoff.

• We foresee stable energy commodity prices (i.e. gas and coal) to have a positive impact on TENAGA and Malakoff while neutral to GMB and PetGas.

• Maintain our NEUTRAL recommendation on the sector, with a BUY call on TENAGA (TP: RM12.57) and HOLD call on Gas Malaysia (TP: RM3.53), Petronas Gas (TP: RM16.52) and Malakoff (TP:RM0.62).

A Variation of Earnings Outcome

Post 4Q2023 earnings season within the utilities sector shows a combination of results where gas utility player aligns with our expectations while power generation player above our prediction.

To recap, Malaysian Reference Price (MRP) in 4Q23 declined 5.0% QoQ and 31.7% in 2023. However, FY23 earnings for GMB only declined by 1.6% YoY stemming from lower gas volume sold due to pullback demand by rubber gloves sector, mitigated by highest MRP in 1Q23. Noted that GMB charges its customers based on MRP plus beta, which includes operating costs and retail margins. For its QoQ performance however, profit escalated by 21.1% due to some reversal of provision and higher sales volume. We reckon GMB’s earnings to remain flattish onwards on the back of stable gas price and subdued volume demand from rubber glove sector that has bottomed out since 2H23. PetGas earnings on the hand declined by 5.1% QoQ dragged by higher operating expenses following a significant maintenance activity. Nevertheless, the group earnings for the year jumped by 10.6% thanks to lower fuel gas costs in tandem with downward movement of benchmark price (MRP) as well as Imbalance Cost Pass Through (ICPT) surcharge imposed (1H23: 20sen/kWh, 2H23: 17sen/kWh) in its Utilities segment. Note that the said segment’s result grew >100% in FY23. We believe this rationalisation in gas price to bodes well with its upcoming earnings as it will slightly lift the operation cost across all segments.

For power generation player, TENAGA 4Q23 bottom-line recorded a remarkable decline QoQ by 31.8% due to the impairment of intangible assets where its Manjung 4 plant faced a forced outage due to issues with steam turbine. Subsequently, its FY23 profit dwindled by 23.9% due to negative fuel margin recognised for the 9MFY23. Notwithstanding, TENAGA finally registered a positive fuel margin in 4Q23 as the base Applicable Coal Price (ACP) hovered <RM30/MMBtu since 2Q23, narrowing the gap with its Moving Average Price (MAP). Meanwhile, Malakoff’s 4Q23 earnings would also be profitable if losses from foreign associate is excluded, since the fuel margin has turned black. Overall, we anticipate both earnings to gradually pick up supported by stable coal prices, Incentive Based Regulation (IBR) scheme and long-term contracts.

NEUTRAL on the sector

Reiterate a NEUTRAL recommendation on the sector, with a BUY call on TENAGA (TP: RM12.57) and HOLD call on Gas Malaysia (TP: RM3.53), Petronas Gas (TP: RM16.52) and Malakoff (TP:RM0.62).

Source: BIMB Securities Research - 7 Mar 2024