The Utilities sector’s earnings performance during the recently concluded 2QCY24 reporting season was remarkable, with three companies exceeding our expectations and two others meeting them. For those that surpassed expectation, TENAGA came out on top, driven by plant efficiency, which boosted earnings as electricity sales reached another record high. This was followed by GASMSIA which benefited from improved retail margins as ASP rose, while MALAKOF surpassed forecasts due to strong power generation earnings. Despite being on track, YTLPOWR continued to experience a decline in PowerSeraya’s earnings. We upgrade the sector to OVERWEIGHT, with TENAGA recently upgraded to OUTPERFORM. TENAGA remains our sector TOP PICK. Our other OUTPERFORM pick is YTLPOWR where we continue to watch for its AI data centre execution.

Another upbeat quarter. The sector reported yet another significant improvement in earnings delivery against our expectations in 1QCY24 sequentially with 60%/40%/0% of companies under our coverage beating/meeting/missing our forecasts, as opposed to 25%/75%/0% in the preceding quarter

The beats. TENAGA’s 2QFY24 core profit topped our forecast as the strong demand growth led to improved plant efficiency that boost generation business. It registered another record quarterly electricity sale (+3.8% QoQ; +6.3% YoY) in 2QFY24, driven by commercial (+8.8% YoY) and domestic segments (+7.7%). The strong commercial sales were largely attributed to the additional demand for new data centres. GAMSIA’s 2QFY24 results beat forecasts again due to higher-than-expected margin spread as a better Malaysia Reference Price (MRP) (+11% QoQ) led to improved retail margin. However, sales volume remained flattish at 38.45m GJ but sales volume from glove makers jumped 9% QoQ to 8.78m GJ which showed a steady recovery after bottoming out in 2QFY23. MALAKOF’s 2QFY24 core profit came above forecasts largely from the higher-thanexpected local power generation earnings with a manageable negative fuel margin of RM61.2m vs. RM571.1m reported in 2QFY23.

The remaining two utilities companies under our coverage met our expectations. While 4QFY24 results were in line, YTLPOWR continued to see PowerSeraya’s earnings falling due to lower margin counter-balanced with pleasant surprises in the turnaround at Wessex Water (on higher tariff) and telco unit (on construction profit). Lastly, PETGAS’s 2QFY24 earnings were flattish which met expectations where it continued to enjoy better margin on the back of lower gas cost as fuel gas price declined.

TENAGA to lead the sector’s growth. We upgraded TENAGA’s demand growth to 3.5% from 3.0% over FY24 to FY35, which fell within the freshly unveiled company’s new FY24 guidance of 3%-4%, from 2%-3%, on the back of strong data centre rollout schedule. A higher demand growth should improve plant efficiency further and hence better earnings. In addition, to cater for developing data centres, higher capex on transmission and distribution (T&D) investment is expected and this adds to fuel regulated asset base which could translate to higher earnings growth. On the other hand, with the reduced volatility on stabilising coal prices, we no longer expect fuel margin shock to persist for TENAGA and MALAKOF.

All eyes on YTLPOWR’s AI data centre delivery as the Blackwell Nvidia chip housed in the 20MW AI data centre is scheduled to be delivered in 1QCY25. Meanwhile, the turnaround of the telco unit was mainly due to construction profit from the RM950m Sabah Point of Presence (PoP) project for laying of fibers over three years. Wessex Water’s turnaround in 4QFY24 was largely due to a higher tariff rate which came into force in April over the next 12 months before a new tariff is set for the new regulatory period commencing April 2025. As such, the UK unit is expected to remain profitable in FY25. Separately, PETGAS is buoyed by the upward revision in the Imbalance Cost Pass-Through (ICPT) surcharge recently, while GASMSIA is poised for a higher sales volume (partly driven by higher demand from glove producers) but will have to come to terms with lower margins as gas prices ease.

Upgrade the sector to OVERWEIGHT following our recent upgrade on TENAGA to OUTPERFORM and as a Top Pick as it is a long-term beneficiary of the influx of FDI to build data centres in the country. In all, 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 up to 6%.

Source: Kenanga Research - 12 Sept 2024