The demand for utilities (i.e. electricity and gas) is expected to rebound in 4Q21 in tandem with Malaysia shifting towards Phase 2-4 of NRP. However, the recent surge in global fuel energy prices has raised concerns on the impact to the economy and utilities sector. We expect the surge in fuel energy prices to be relatively short-term and the RAB-ICPT mechanisms remain intact, protecting TNB from the surge of fuel costs (to be covered by combination of subsidies by government/KWIE and allowing surcharge to end users), while YTLP and PGB are not directly affected by the fuel energy prices. Utility-cos are also adhering to government’s commitment towards carbon neutrality by 2050. We maintain Overweight on Utilities sector, with BUY for TNB (TP: RM12.50); YTLP (TP: RM0.85); and PGB (TP: RM19.00), on the companies’ stable earnings and sustainable dividend payouts.

Recovery utilities demand. With the number of new Covid-19 cases coming down and increasing vaccination rate nationwide, Malaysia is progressing well into Phase 2, 3 and 4 of National Recovery Plan (NRP). Demand for utilities i.e. electricity and gas, are expected to recover in 4Q21 as more economic activities are being allowed in tandem with the gradual relaxation of lockdown measures.

Surge in energy prices. Global energy prices have recently surged drastically due to overwhelming demand as countries are stocking up on back of economy recovery and anticipation of a severe coming winter season in northern hemisphere, while supplies are hit by production problems. It was reported that spot coal price has reached US$230/mt (RM920/mt) while spot Asian LNG price hit US$25/mmbtu (RM100/mmbtu). Similar to 2007-2008, we believe the current high prices are unsustainable and will ease in 2022 post winter season and production being ramped up. Nevertheless, the surge has certainly raised concerns on the impact to Malaysia economy and the utilities sector in terms of electricity generation cost and demand for utilities at least in the short term.

RAB – fuel cost pass-through. Under RAB framework, there is an ICPT mechanism to pass-through the fluctuation of fuel costs to end users. Historically, government has been subsidizing fully (through KWIE or other funds) or partially and allowed to pass through the higher energy fuel costs to end users in the form of surcharges. Hence, we expect TNB to remain neutral from the recent surge in energy prices (except for short term cash flow impact due to timing recognition mismatch), while PGB and YTLP are not directly affected by fuel costs.

Going green. Under the recent 12MP, government has again highlighted its commitment to reduce carbon emissions intensity by 45% by 2030 and achieve carbon neutrality by 2050 by accelerating RE programs, replacing expiring coal-fired power plants with new gas-fired power plants and RE. Higher RE mix will also reduce the impact from the energy fuel price volatility in the future. TNB has already committed towards carbon neutrality by 2050 in line with government’s policy, while YTLP has started planning for its first LSS 500MW in Malaysia. PGB is also exploring opportunities for new Co-gen plants, while being expected to benefit from the increasing demand for LNG/gas in Malaysia.

Maintain OVERWEIGHT. We maintain our sector call on Utilities with OVERWEIGHT, 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: RM19.00).

Source: Hong Leong Investment Bank Research - 18 Oct 2021