Utility Sector Is Expected to Sustain Into 2H21, as IBR/ICPT Frameworks Remain Intact and Demand for Utility Products Will Rebound as the Country Progress Through the NRP’s Reopening Phases. Utility Groups Continued to Invest Into Their Infrastructure and Acquisition for Earnings Growth. We Expect Dividend Yield for the Sector to Sustain With Potential Special Dividend Payout. We Upgrade Our Sector View to OVERWEIGHT (from Neutral), With BUY for TNB (TP: RM12.50), BUY for YTLP (TP: RM0.85) and BUY for PGB (TP: RM19.00).
IBR/ICPT intact. IBR/ICPT framework remains intact despite the ongoing implementation of FMCO (Phase 1) nationwide. The framework protects TNB (power transmission and distribution) and PGB (gas transportation and regasification) from the fluctuation in demand as well as input costs over the longer term (any shortage will be compensated in subsequent review period and vice versa for surplus). Hence, large portion of both TNB and PGB’s earnings are expected to remain stable in 2H21.
Demand for utility products to rebound in 2H21. Demand for electricity and gas in Malaysia would be affected during FMCO implementation in Jun-Jul, but we expect a recovery in 2H21 as we progress through the National Recovery Plan’s (NRP) reopening phases. However, the sector earnings are not expected to be materially affected:
Earnings sustainability. Utility groups are positioning themselves for long term earnings sustainability by continued capex investment and exploring new/ancillary business opportunities.
Sustainable dividends. With the certainty of earnings, all the utility groups are expected to sustain their cash flows and maintain dividend payouts. We projected dividend yields for Tenaga at 5.1%, YTLP at 4.3% and PGB at 5.5% with potential special dividend for the year.
Upgrade to OVERWEIGHT. We upgrade our sector call on Utility to OVERWEIGHT (from Neutral), given the earnings and dividend sustainability of the sector in a time of market uncertainty plagued by the pandemic. Maintain BUY on TNB (TP: RM12.50), YTLP (TP: RM0.85) and PGB (TP: RM19.22).
Source: Hong Leong Investment Bank Research - 6 Jul 2021
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