Kenanga Research & Investment

Utilities - 1QCY23 Results Review: Rock Solid Earnings

Publish date: Thu, 08 Jun 2023, 09:50 AM

We maintain our NEUTRAL rating on the utilities sector for its earnings defensiveness and decent dividend yields of 4%-6%. The sector’s 1QCY23 results were largely within expectations, with half of the stocks under our coverage universe meeting our forecasts, while one outperformed and two underperformed. The outperformer YTLPOWR (OP; TP: RM1.48) reported yet another set of upbeat results driven by strong performance from PowerSeraya. Easing fuel prices at present are positive to TENAGA (OP; TP: RM10.64) and PETGAS (MP; TP: RM17.13) but negative for GASMSIA (MP; TP: RM3.54). Nonetheless, the impact is neutral over the long term given the fuel cost pass-through mechanism. YTLPOWR remains our sector top pick for the promising prospects of PowerSeraya, defensive Wessex Water’s earnings and its exciting new data centre and digital banking ventures.

A mixed bag. There were no major surprises in the recent 1QCY23 results season with 17%, 50% and 33% coming above, within and below our forecasts, as opposed to 17%, 67% and 17% in the preceding quarter. YTLPOWR was the only outperformer again with its 9MFY23 results beating our forecasts yet again due to stronger-than-expected performance of its Singapore IPPs. However, MALAKOF’s (OP; TP: RM0.80) 1QFY23 results disappointed with wider losses on fuel margin loss as its weighted average coal cost came in higher than the applicable coal price as coal price declined sharply. SAMAIDEN’s (OP; TP: RM1.15) 9MFY23 results also fell short of expectations on higher-than-expected staff cost and professional fees, and listing expenses. Meanwhile, the 1QFY23 results of TENAGA’s, PETGAS and GASMSIA were largely within our expectations.

Generally resilient. The 1QCY23 results are a testament to the earnings defensiveness of regulated assets while variances, either upside or downside, came largely from non-regulated assets. With the declining fuel prices, TENAGA’s under-recovery Imbalance Cost Pass-through (ICPT) contracted 43% QoQ to RM3.63b, thus ICPT receivable fell to RM13.8b from the record high of RM16.9b in 4QFY22. Similarly, PETGAS benefited from low gas price leading to lower internal gas consumption (input cost) for its regulated business as well as non-regulated utilities segment. On the other hand, GASMSIA’s gas selling price remained high (which we believe had peaked) which led to topline growth but bottomline was affected by higher repair and maintenance costs. Meanwhile, YTLPOWR continued to enjoy superb PowerSeraya’s earnings given the strong retail prices while MALAKOF was hit by higher fuel margin loss as its weighted average coal cost came in higher than the application coal price. Lastly SAMAIDEN’s 3QFY23 results were hit by higher operating costs. 

While earnings for regulated business are largely resilient, low fuel costs, i.e., coal or gas costs are near-term positive for TENAGA and PETGAS but negative for GASMSIA. Nonetheless, the impact is neutral in the longer term due to lag-effect of fuel cost pass through adjustment. We maintain our NEUTRAL rating on the utilities given limited upsides. However, we continue to like the sector for its earnings defensiveness which is backed by resilient earnings from regulated assets. Recurring cash flows also anchor decent yields of 4%-6%. YTLPOWR is our top pick for the sector given the improved earnings prospects following the turnaround of PowerSeraya, the revised new tariff rate from Apr 2023 keeping Wessex Water’s earnings resilient and huge potential from its new data centre and digital banking ventures.

Source: Kenanga Research - 8 Jun 2023

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