The demand for utilities (i.e. electricity and gas) is expected to sustain into 2023, in tandem with full economic recovery during the year. The stubbornly high global fuel energy prices remains a concern for investments. On a positive note, Utilities sector is largely protected under RAB/ICPT mechanisms and long term contracts to protect the players from the volatile fuel energy costs. Core earnings for the sector has remained strong for the past quarters. Utility-cos are committed to improve their green energy portfolio, in line with global calls for carbon neutrality. We maintain OVERWEIGHT on Utilities, with BUY for TNB (TP: RM11.65) and YTLP (TP: RM1.08) on the companies’ stable earnings and sustainable dividend payouts. Maintain HOLD on PGB (TP: RM17.85) given the lower adjusted tariffs under RP2 2023-2025 review.

Utilities demand sustaining. Since Malaysia’s transition to endemicity in April-22, demand for utilities (i.e. electricity and gas), has continued to show progressive growth (see Figure #1). Similarly, this was also witnessed in other countries such as Singapore and UK. Demand is expected to sustain into 2023 as governments continued to focus on economic recovery post transitioning into endemic phases.

Volatile energy prices. After recent gas price peaked (Europe) in Aug 2022 and coal price (Australia) peaked in Sep 2022, these have retraced mainly due to high inventory levels in Europe market while winter temperature was milder than expected. Nevertheless, the current prices of gas and coal remains elevated. Spot coal price in Australia is currently trading at USD400/mt (RM1,760/mt) and Indonesia at USD280/mt (RM1,250/mt), which is affecting the electricity costing in Malaysia, given that the commodity (despite lower quality coal at cheaper pricing) is fully imported and the coal power generation contributed ~60% of Peninsular electricity. On a brighter side, Malaysia gas pricing (by Petronas) is still heavily discounted at RM40.17/mmtbu in 3Q22 and expected to hike to c.RM50/mmbtu in 4Q22 as compared to Europe’s pricing at RM100/mmbtu and China imported LNG pricing at RM215/mmtbu (from Malaysia).

Source: Hong Leong Investment Bank Research - 4 Jan 2023