• Maintain OVERWEIGHT; Top Picks: Tenaga Nasional (TNB), YTL Power, and Solarvest. Electricity demand is set to remain fairly resilient in 2H23. With core prices expected to normalise in the upcoming quarters, the impact of fuel margins may still affect coal-fired power plant players’ bottomlines – albeit to a moderate extent. We remain positive on the National Energy Transition Roadmap (NETR), given its clear goals and funding requirements being laid out. Further concrete frameworks and mechanisms are expected to be announced in the coming months.

• A weaker quarter. In the recent reporting period, eight companies under our coverage released 2Q23 results. Two booked numbers that were within expectations. The four disappointments were Malakoff Corp, Taliworks, Ranhill Utilities, and TNB. For Ranhill, the negative deviation was due to a weaker-than-expected water segment, while Taliworks disappointed on higher-than-expected costs and the slow progress of its Sungai Rasau projects. Conversely, both TNB and Malakoff missed expectations, with unexpected losses that stemmed from substantial negative fuel margins. These, in turn, were the result of the volatility in applicable coal prices. YTL Power continued to be the only outperformer with its strong set of FY23 (Jun) results, led by stronger-than-expected contributions from its power generation arm.

• Outlook. Electricity demand rose in tandem with GDP growth in 2Q23 (+3.3% YoY), with new peak demand of 19,716MW recorded in May. We saw a rise in the coal generation mix to 60.1% (1Q23: 53.7%) at the expense of the gas mix which, in turn, dropped to 34% (1Q23: 39.5%). TNB’s total renewable energy (RE) capacity stood at 4GW as of June, and it is targeting to increase domestic RE capacity by another 1.2GW by 2025. TNB is also looking to secure five data centres of a total consumption of c.2GW this year. With core prices set to normalise in the upcoming quarters, the fuel margin impact may still affect coal-fired power plant players’ bottomlines – albeit to a moderate extent.

• Our take on the NETR. The NETR project’s 70% RE capacity is to be dominated by solar at 58% of total installed capacity, followed by hydro and bioenergy at 11% and 1%. Hence, solar photovoltaic or PV capacity is likely to expand aggressively, at a CAGR of 14%, to 57GW by 2050. We still reiterate that the local solar EPCC contractors are the direct beneficiaries of such a structural uplift. As gas will continue to be the dominant source of fuel for baseload power, we believe existing independent power producers (IPPs), ie TNB and Malakoff, are likely to see new gas-fired plant expansions in future following the retirement of their existing coal-fired plants. Capex-intensive projects – hydrogen and carbon capture, usage & storage or CCUS – are likely to be spearheaded by big corporations such as Petronas and TNB, while the battery energy storage system or BESS market remains largely untapped.

Source: RHB Securities Research - 14 Sept 2023