• Top Picks: Tenaga Nasional (TNB), YTL Power (YTLP) and Solarvest. We upgrade our sector rating to OVERWEIGHT from Neutral, after lifting our call for TNB to BUY from Neutral. YTLP remains our preferred pick, due to its strong earnings delivery – largely backed by PowerSeraya and with further upside from its Jordan plant. We also favour domestic solar power players, premised on their solid orderbooks and further catalysts stemming from lower solar module prices.
   
• TNB’s imbalance cost pass-through (ICPT) receivables to trend lower. Following the recent announcement on tariff adjustments, we upgraded TNB to BUY. This was due to the limited regulatory risks, as the Government is maintaining the ICPT framework, and making consistent payments to TNB. TNB has received MYR9.13bn out of a total MYR10.4bn in ICPT cost recovery in 1H23 from the Government. The Government is committed to subsidise MYR5.2bn (MYR4.7bn of this remitted to TNB) in 2H23, so we estimate that the remainder will be collected from the surcharges imposed. As such, we expect ICPT receivables to decrease, relieving TNB’s working capital pressure amidst moderating coal prices.
   
• Global renewable energy (RE) scene remains robust; domestic solar power players should do well, too. International Energy Agency (IEA) expects global RE capacity growth to continue reaching new highs in 2023- 2024. Of this, the solar photovoltaic (PV) segment should continue to dominate the picture and account for two-thirds of such growth. All the major markets such as China, Europe, the US and India are likely to contribute strong numbers, thanks to lower module prices and favourable policy-led initiatives. Domestic EPCC contractors will likely register strong earnings in 2H23 on their solid orderbooks, largely underpinned by Large-Scale Solar 4 (LSS4) contracts as well as strong commercial and industrial (C&I) demand. We see further tailwinds from easing cost factors, as solar module prices have dipped to USD0.17/W (from USD0.23/W in early 2023) and may further retrace to USD0.15/W. Note that polysilicon prices have plunged by 56% YTD and 80% from the peak in Aug 2022 due to oversupply.
   
• Singapore’s Energy Market Authority (EMA) will introduce a temporary price cap (TPC) – effective 1 Jul – on wholesale electricity prices, to prevent huge swings in electricity prices. We were guided that the TPC will have a minimal impact on YTLP as bulk of the generated volume (c.75- 80%) is sold to its retail arm, and the rest sold to SP Services (under a vesting contract scheme) and the wholesale pool. The former is generally locked in under different contracts ranging from six months to two years in fixed prices. As such, margins are mostly fixed – since YTLP has also entered into competitive gas contracts for the next few years. We are also guided that the 45%-owned oil shale plant in Jordan will likely start contributing in FY24, so we think there should be some earnings upside from the PowerSeraya and Jordan plants.

• Downside risks to our outlook: Unfavourable effect of regulatory changes, higher operating costs and unscheduled plant outages.

Source: RHB Securities Research - 30 Jun 2023