We maintain our OVERWEIGHT recommendation on the utilities sector. There was a slight sequential improvement (against expectations) in the recently concluded 2QCY22 results season. The results spoke eloquently for earnings resilience of regulated assets while variances (both upside and downside) came largely from the non-regulated part of the business. We continue to like the sector for its earnings defensiveness backed by regulated assets. Recurring cash flows will anchor dividend yields of 4%-5%. TENAGA is our top pick premised upon: (i) it being a reopening play, (ii) its risk premium easing as energy prices come off their peaks, and (iii) it being a beneficiary of the return of foreign investors given its significant weighting in key indices.

Mostly positive. There was a slight sequential improvement in the recently concluded 2QCY22 results season with 29%, 29%, and 43% coming in above, within and below our forecasts vs. 17%, 17% and 67% during the preceding quarter. GASMSIA’s (OP; TP: RM3.43) 1HFY22 earnings beat our forecast as strong gas prices lifted retail margins. Similarly, YTLPOWR’s (OP; TP: RM0.97) FY22 results exceeded our projection largely due to strong contributions from associates PT Jawa Power in Indonesia. On the other hand, TENAGA’s (OP; TP: RM10.17) 2QFY22 results missed our forecast owing to our underestimation of the prosperity tax and timing difference between the actual fuel costs incurred vs. the fuel costs entitled under the Imbalance Cost Pass-Through (ICPT) mechanism, while PETGAS’s (MP; TP: RM17.00) 2QFY22 results were weighed down by higher fuel cost, i.e., gas, at its utilities unit and a weak MYR. On the other hand, PESTECH’s (MP; TP: RM0.35) FY22 results missed forecast significantly due to project cost overrun and delays, and most of its projects still at initial stages with insignificant profit recognition. Meanwhile, MALAKOF (OP; TP: RM0.90) 1HFY22 and SAMAIDEN’s (OP; TP: RM0.86) FY22 results met our expectations.

Generally resilient. The 2QCY22 results season spoke eloquently for earnings resilience of regulated assets while variances (both upside and downside) came largely from the non-regulated part of the business. While there are concerns over TENAGA’s ballooning under-recovery of fuel costs, we are not perturbed as it will eventually be recovered under the Incentive-Based Regulatory (IBR) framework. Similarly, >90% of PETGAS’s earnings are safeguarded by the IBR framework while GASMSIA will continue to benefit from the high gas prices at its retail unit. We also foresee better earnings stability at YTLPOWR (on more sustained profitability at PowerSeraya) and MALAKOF (as the 1,000MW coal-fired plant under Tanjung Bin Energy is back online after repair works). SAMAIDEN is a poster child of the RE adoption in Malaysia, but the same cannot be said of PESTECH which will continue to be weighed down by margin compression on soaring input costs and less-than-optimal project execution.

Maintain OVERWEIGHT. We continue to like the sector for its earnings defensiveness backed by regulated assets. Recurring cash flows will anchor dividend yields of 4%-5%. TENAGA is our top pick premised on: (i) it being a economy reopening play underpinned by the recovery of electricity demand from the commercial and industrial sectors, (ii) its risk premium (largely due to the ballooning under-recovery of fuel costs) easing as energy prices come off their peaks, and (iii) it being a beneficiary of the return of foreign investors given its significant weighting in key indices.

Source: Kenanga Research - 8 Sept 2022