The demand for utilities (i.e. electricity and gas) is expected continue its recovery trend into 2022, in tandem with economic reopening under Phase 4 of NRP. Recently global fuel energy prices has retraced after reaching a high in Oct, which reaffirmed our view on relatively short-term surge and normalization in 2022 post winter season. TNB is expected to remain neutral under RAB-ICPT mechanism, as the higher energy cost will be recouped via a combination of government subsidies and surcharge to end users. YTLP and PGB are not directly affected by the fuel energy prices. Utility-cos are committed to improve its green energy portfolio, in line with nation’s policy to achieve carbon neutrality by 2050. We maintain OVERWEIGHT Utilities sector, with BUY for TNB (TP: RM13.60); YTLP (TP: RM0.85); and PGB (TP: RM19.00), on the companies’ stable earnings and sustainable dividend payouts.

Recovery in utilities demand. Malaysia is progressing well into Phase 4 of National Recovery Plan (NRP), as national vaccination rate has hit an advanced stage while number of new Covid-19 cases remains under control. Demand for utilities, i.e. electricity and gas, are expected to continue its recovery trend into 2022 in tandem with the economic reopening. Furthermore, national borders are expected to be relaxed in 2022, with vaccinated travel lane (VTL) with a number of countries.

Volatile energy prices. After recent coal prices recorded high in Oct 2021, prices have retraced as China cracked down on coal hoarding and speculative trades, while production is ramped up globally. Spot coal price has eased to USD150/mt (RM600/mt) from a high of USD250/mt (RM1,000/mt). The retracement has reaffirmed our view on coal prices to further ease in 2022 post winter season. On a brighter side, domestic gas price was still relatively stable at RM32.72/mmBtu (Oct 2021) and the price did not fluctuate with the surge in global spot LNG price (>RM100/mmBtu).

RAB – fuel cost pass-through. Under RAB framework, the ICPT mechanism allows for pass-through of fuel costs to end users. Historically, government has been subsidizing fully (through KWIE or other funds) or combination of partial subsidies and partial pass-through to end users (usually affecting non-domestic consumers). 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. Government has announced further extension of RP2 in 2022, with effective average tariff 37.45sen/kwh for 1H22, indicating TNB to receive compensations from government for the higher fuel costs incurred in 2H21.

Going green. Government is committed to reduce carbon emissions intensity by 45% by 2030 and achieve nationwide carbon neutrality by 2050 by accelerating RE programs and reducing reliance on coal-fired power plants over time. The higher RE mix will reduce the overall impact of global energy fuel price volatility to Malaysia’s electricity tariff. However, the higher RE mix policy will also pose earnings sustainability risk to large power generation players, as they face increasing competitive market for the replacement of their expiring power plant portfolio (especially coal). 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 (Paka 585MW PPA expired in Jun 2021). PGB is also exploring opportunities for new Co-gen plants, while at the same time, benefitting from the increasing demand for LNG/gas as cleaner source of energy 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: RM13.60), YTLP (TP: RM0.85) and PGB (TP: RM19.00).

Source: Hong Leong Investment Bank Research - 7 Jan 2022