We cut our sector recommendation for the utilities sector to NEUTRAL from OVERWEIGHT following our recent downgrade on TENAGA (after the recent run-up in its share price). For sector coverage, while 4QCY22 results were largely within expectations, we saw only one outperfomer as opposed to three previously. The latest report cards also help to reaffirm our view on the earnings resilience of regulated assets as the expectation variance came largely from non-regulated assets. YTLPOWR (OP; TP: RM1.09) is now our sector top pick backed by the turnaround of PowerSeraya and earnings defensiveness of Wessex Water.

Largely met expectations. There were less upside surprises in the recent 4QCY22 results season with 17%, 66% and 17% coming above, within and below our forecast, as opposed to 50% each for above and inline in the preceding quarter. YTLPOWR was the only outperformer with its 1HFY23 results beating our forecasts yet again due to stronger-than-expected performance of its Singapore IPPs and consistently higher associate income primarily from PT Jawa. However, TENAGA’s (MP; TP: RM10.00) FY22 results disappointed on higher interest costs as its total debt rose to partly finance the rising imbalance cost pass-through (ICPT) receivable. Meanwhile, the FY22 results of PETGAS (MP; TP: RM17.13), GASMSIA (MP; TP: RM3.54) and MALAKOF (OP; TP: RM0.95), and the 1HFY23 results of SAMAIDEN (OP; TP: RM1.15) were largely within our expectations.

Generally resilient. The 4QCY22 results season spoke eloquently yet again for earnings resilience of regulated assets while variances (both upside and downside) came largely from non-regulated assets. Although TENAGA’s ballooning under-recovery of fuel costs with ICPT receivable hit a record high of RM16.9b from RM15.5b in 3QFY22 , we are not perturbed as it will eventually be recovered under the Incentive-based Regulatory (IBR) framework. TENAGA will fully recover the net imbalance cost via: (i) the ICPT surcharge of 20.0 sen.kWh pass-through to non domestic customers, and (ii) RM10.4b cost recovery from the government. 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 non regulated retail unit. We also expect 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 as the recent electricity tariff hikes have significantly increased the viability of solar power as an alternative energy source, boosting investment in solar infrastructure.

Cut to NEUTRAL from OVERWEIGHT following our recent downgrade on TENAGA as it is now fully valued after the recent run-up in its share price. However, we continue to like the sector for its earnings defensiveness which is backed by resilience earnings from regulated assets. Recurring cash flows also anchor decent yields of 4%-5%. While the bigger caps are largely rated NEUTRAL, YTLPOWR is our sector top pick backed by the turnaround of PowerSeraya and earnings defensiveness of Wessex Water.

Source: Kenanga Research - 9 Mar 2023