KUALA LUMPUR (June 26): MIDF Research remained neutral on the utilities sector and expects players operating in a more liberalised electricity markets to be better positioned to respond to demand-supply conditions and input costs.

The research house in a note on Monday (June 26) said the government’s latest Imbalance Cost Pass-Through (ICPT) announcement was broadly positive for mid-to-high voltage non-domestic consumers (industrial and commercial sectors) given a 5% reduction in effective electricity cost, while the biggest winner was the water and sewerage sector, which was given a significant 27% reduction in effective tariffs.

As such, it maintained its recommendations on YTL Power Bhd (Buy, TP: RM1.54) and YTL Corporation Bhd (Buy, TP: RM1.05), given their exposure to the Singapore power sector.

“While we note the recent announcement by the Energy Market Authority of the temporary switch to a dynamic price cap, we believe this would have limited impact on YTL Power as the majority of YTL Power’s capacity is locked in long-term contracts.” it added.

“Additionally, it is one of the more efficient generators — capping price spikes are likely to affect generators with the least efficient capacity as they are the last to get on the grid, in our opinion,” it said.

MIDF also favoured the water utilities space as a play into the recent non-domestic sector tariff hike and the upcoming domestic sector tariff review. Its top pick for the sector was Ranhill Utilities (Buy, TP: RM0.73).

Meanwhile, the research house remained neutral on Tenaga Nasional (Neutral, TP: RM10.00) following the government’s ICPT decision, which underpins improvements in its receivables position leading to improved cash flow prospects.

Although coal price has come off significantly, market price at the latest US$133/MT is still 68% higher than the Regulatory Period 2022-2024 (RP3) projection of US$79/MT.

Additionally, the ringgit continues to remain weak at US$:RM4.60, weaker than RP3 projection of US$:RM4.12.

“As such, we expect Tenaga’s (Neutral, TP: RM10.00) ICPT under recovery position to remain in the near-term, albeit at much lower levels than that in 2H22,”it said.

“However, the positives from these are already reflected in our valuation,” added MIDF.

MIDF noted that the latest 2H2023 ICPT review reflects easing global fuel prices, in particular, coal price which has more than halved the peak levels of US$463/MT seen in 2H2022.

To recap, the government’s targeted subsidy rollback has continued, with high consumption domestic consumers now charged a 10sen/kwh surcharge from a 2sen/kwh rebate previously. In the non-domestic consumer segment, a clear winner is the water and sewerage utilities, now charged a much lower 3.7sen/kwh surcharge from a 20sen/kwh surcharge previously.

MIDF also noted that water and sewerage operators now fall under a special category.

All in, the government will still bear a subsidy of RM5.2billion, albeit less than half of the RM10.8billion subsidy allocated for the 1H2023 period, said MIDF.

The research houses also expect solar EPCC players such as Solarvest, Samaiden, Sunview and Pekat standing to benefit from relaxed conditions for net metering (NEM) and self-consumption (SELCO).