• We turned more optimistic on power players ahead of the implementation of TPA in the power sector. This will lead to a booming investment in energy projects amidst decarbonization effort, in our view.

• In addition, we foresee TPA to benefit the existing/expired plant as it can explore to resume power supply directly to end user as well as seeking for a better tariff. More importantly, this will address the concern on long-term earnings visibility of power producer beyond PPA period.

• As such, we upgrade Utilities sector to OVERWEIGHT (from Neutral). Accordingly, we upgrade our recommendation on Tenaga and Malakoff to a BUY with TP of RM16.00 and RM0.90 respectively. Meanwhile, we maintain HOLD for Gas Malaysia (TP: RM3.83) and Petronas Gas (TP:RM16.52).

Urgent Need for Reform amidst Robust Power Demand

Government has announced to begin the Third-Party Access (TPA) in the power sector earlier to September 2024 (from its initial plan in 2025) due to the overwhelming interest from Data Center (DCs) demand. While details are still limited, we expect to get more clarity on the initiative by July this year. However for sure, power producers will still have to rely on Tenaga’s transmission lines for power distribution.

Liberalisation of Power Industry: A Game-changer

Overall, we are greatly encouraged with the liberalization of power industry. We foresee that it will benefit power producers with the opportunity to extend the expired/expiring Power Purchase Agreement (PPA) of power plants to supply power directly with end customers. Besides that, it will also give the power producer a bargaining power to secure a better tariff.

Notably, Malakoff has 2 plants that are expired and going to expired such as the GB3 (2022) and Prai (2024). In addition, it has already set a long-term plan to replace its 2.1GW Tanjung Bin Power Plant (TBPP) with a 2.3GW CCGT plant upon its decommissioning in 2031. Similarly, Tenaga has several CCGT plants with various expiries which are located at Pasir Gudang (2022), Gelugor (2024), Putrajaya (2025), Tuanku Jaafar PD1 (2028) and Tuanku Jaafar PD2 (2030). We are sanguine that TPA will provide these companies with additional upside to earnings from this expiring and expired PPA.

Tenaga as the Main Beneficiary of Investment in Grid Upgrade

Given the rising demand for RE in the energy mix, the investment in grid upgrade is vital. We believe TPA will continue to put greater emphasis on investment in transmission and distribution network to make it more flexible. The government estimated that investment amounted to RM180bn would be required up until 2050 to develop a reliable grid. Overall, this will boost Tenaga’s earnings from the expansion of regulated asset base (RAB) in the coming years.

Export of Green Electricity to Begin

Energy Exchange Malaysia (ENEGEM) was introduced to facilitate the export of Green Electricity. Single Buyer was appointed to manage the green energy export and it will be done via a bidding mechanism. The said program will commence with a pilot project to export 100MW of electricity to Singapore for a duration of 1 year from Sept 2024 until Aug 2025. The government plans to expand to 300MW afterwards, however subject to the pilot project response.

As such, we foresee an opportunity for Malakoff to participate in electricity export to Singapore owing to its strategic location and readily established plant to offer. Besides that, Tenaga will also be enjoying wheeling charges imposed to the grid user. Of note, regulators are now in discussion for wheeling charges to be implemented in Regulatory Period 4 (2025-2027) and further announcement scheduled at the end of this year.

Aggressive RE Portfolio Expansion

As of 1Q24, RE made up about 7.9% from generation mix (i.e. Hydro: 5.9%, Solar: 2.0%) vs 6.7% in 1QFY23. With TPA to be in place soon, we expect a booming investment in energy projects amidst decarbonization effort to reach RE target of 70% of energy mix by 2050.

Tenaga’s RE portfolio in operation grew 10% YoY in 1Q24 to 4,318MW thanks to contribution from international investment from new acquisitions in Australia and Ireland. To date, the group has secured additional 6.2GW (currently under construction and development stage). This bringing cumulative RE capacity to 10.5GW which has surpassed its 8.3GW target by 2025. To recap, Tenaga is among the national champion for National Energy Transition Roadmap (NETR) initiatives where they were awarded 2.5GW of Hybrid Hydro-Floating Solar PV (HHFS) and LargeScale Solar Parks project (5x100MW) as well as the investment for Hydrogen, Ammonia, CCUS (Carbon Capture, Utilisation and Storage), and BESS (Battery Energy Storage System). For Malakoff, the group is acquiring two companies namely ZEC Solar Sdn Bhd and TJZ Suria Sdn Bhd with 51% and 49% remaining stake respectively for RM27mn. Notably, ZEC Solar is the owner and developer of a 29MW LSS facility in Kota Tinggi, Johor with 21 years PPA. The acquisition is expected to be completed within three months from the signing date of sale share agreement, bringing total effective RE capacity to 128MW. The group aims to reach 1.4GW of RE capacity by 2031. Apart from that, the group is also acquiring 49% stake in E-Idaman (estimation of 3-5% to earnings from FY25F onwards) while finalising WTE plant Sg Udang concession agreement with Unit Kerjasama Awam Swasta (UKAS). Additionally, the group guided it has set aside RM500mn to RM1bn for merger and acquisition.

Earnings Forecast

No changes to Tenaga’s earnings forecast while we upgrade Malakoff’s 2024F/2025F earnings forecast by 70%/65% to RM313mn/RM346mn as we revised fuel margin assumption (Table 2).

Upgrade Utilities Sector to OVERWEIGHT

We upgrade our recommendation for the sector from NEUTRAL to OVERWEIGHT premised on reforms of the power sector market as well as spillover impact to gas player. We anticipate government will spur more investment onwards to ensure the nation’s energy security. As such, we revamp our call for Tenaga to BUY (from HOLD) with a TP of RM16.00 (from RM12.57) based on FY25F EPS of 73sen pegged to PER of 21.8x (Chart 1). This is 33% premium to 2 years historical mean. We also upgrade Malakoff to a BUY with DCF derived TP of RM0.90 (from RM0.62). We think this is fair given positive outlook for power sector amidst the expected reform measures.

Source: BIMB Securities Research - 15 Jul 2024