We cut our sector recommendation for the utilities sector to NEUTRAL from OVERWEIGHT following our recent downgrade on TENAGA. Meanwhile, the sector’s earnings delivery during the recently concluded 4QCY23 results season failed to excite with three companies meeting and two missing our expectations. TENAGA (MP; TP: RM11.40) was hit by high fuel cost while MALAKOF (MP; TP: RM0.68) was weighed down by a huge share of losses from its Bahraini associate. On the other hand, YTLPOWR (OP; TP: RM4.10) posted a strong quarter but with a sequential decline in earnings. Meanwhile, earnings of PETGAS (MP; TP: RM17.80) were boosted by a hike in Imbalance Cost Pass-through (ICPT) surcharge while GASMSIA’s (MP; TP: RM3.33) earnings eased as gas prices normalised.

The sector’s earnings delivery (against our expectations) during the recently concluded 4QCY23 results season failed to excite with 60% and 40% coming in within and below our forecasts, as opposed to 40%, 20% and 40% beating, meeting and missing in the preceding quarter, respectively. TENAGA’s 4QFY23 results were hit by high fuel cost while MALAKOF reported a huge share of losses from its 40%-owned associate Al Hidd Independent Water and Power Producer in Bahrain pursuant to an accounting adjustment on the basis that there will be no further extension to the concession. Meanwhile, the 2QFY24 results of YTLPOWR and the 4QFY23 results of GASMSIA and PETGAS were largely within our expectations.

Despite the weak numbers from TENAGA and MALAKOF, we believe their long-term earnings resilience is intact backed by their regulated assets. With coal prices stabilising, TENAGA saw its first positive fuel margin in 4QFY23 since 4QFY22 while the latest Imbalance Cost Pass-through (ICPT) under-recovery of RM2.11b was 67% off the peak of RM6.40b in 4QFY22. Similarly, MALAKOF also reported first positive fuel margin in a year as coal prices stabilised. On the other hand, PETGAS did not face high internal gas consumption (input cost) like in the past quarters for its regulated business as well as non-regulated utilities segment. In fact, its utilities segment benefited from the upward revision of ICPT surcharge. Meanwhile, GASMSIA posted higher earnings largely due to higher sales volume but its margins were compressed as gas prices declined. Similarly, YTLPOWR still posted strong quarter but with a 9% QoQ decline as PowerSeraya’s earnings peaked as retail prices normalised.

We down our sector recommendation to NEUTRAL from OVERWEIGHT following our downgrade on TENAGA. However, we continue to like the sector for its earnings defensiveness and resilience backed by regulated assets that generate recurring cash flow to anchor decent dividend yields of 3%-6%. Our sector top pick is YTLPOWR given its geographically diversified regulated asset base, strong near-term earnings prospects of PowerSeraya backed by gas inventory locked in at low prices and its long-term growth potential driven by its data centre and digital banking ventures.

Source: Kenanga Research - 11 Mar 2024