We are mildly positive on Budget 2024. Nonetheless, we are disappointed that the exact mechanism for RE exchange hub has yet to be finalised given the looming deadline for Singapore’s RFP2 to Appoint Licensed Electricity Importers. Maintain Overweight on P&U sector as we believe companies within the sector will gain exciting earnings growth opportunities as they embark on Malaysia’s energy transition aspirations. Further upside catalyst for the sector will be from the finalisation of Malaysia’s RE exchange hub, hopefully by the end of this year.

Our Take: No Major Surprises

The measures for Budget 2024 are mildly positive for Power & Utilities (P&U) sector. There were no major surprises. In fact, we are disappointed that the government has yet to roll out the mechanism for the renewable energy (RE) exchange hub. Although the ban for cross-border export of RE has been lifted back in May 2023, we understand that Malaysia is currently not exporting any RE to Singapore pending the finalisation of RE exchange hub. Note that Malaysia is short on time as the deadline to submit non-binding express of interest proposal to Energy Market Authority (EMA) of Singapore for the 2nd Request for Proposal (RFP2) to Appoint Licensed Electricity Importers will be in 2-month time on 29 December 2023.

Measure 1: Expansion of targeted electricity subsidies by removing subsidies for the top 10% users.

Measure 2: Increase service tax rate from 6% to 8% for monthly consumption above 600kWh.

The expansion of targeted electricity subsidies does not come as a surprise. For 2H2023, the government has already announced ICPT surcharge of 10 sen/kWh for residential customers with total monthly consumption exceeding 1,500kWh (equivalent to top 1% of residential users in peninsular Malaysia), while maintaining 2 sen/kWh rebate for those with monthly consumption not exceeding 1,500kWh. The latest move is an expansion of
previous measure from top 1% of residential users to top 10% of users. Additionally, there is an increase in service tax from 6% to 8% for monthly consumption above 600kWh.

We expect both measures to lead to demand reduction for residential consumers. However, considering that TENAGA (Buy, TP: RM11.00) is largely shielded from demand risk as the group can clawback the revenue shortfall, we do not expect material impact on the group’s earnings.

Measure 3: Fuel subsidy rationalisation starting with increasing diesel price for all users except for freight companies.

Diesel price is currently fixed at RM2.15/litre compared with market price of c.RM3.75/litre. Although the exact mechanism is not disclosed, we expect the diesel price ceiling to be raised gradually, followed by price ceiling for RON95 once the Central Database Hub (Padu) is ready. We believe diesel and RON95 will eventually be floated at market price but at a gradual pace to minimise impact on consumers. The increase in selling price for diesel will lead to demand destruction and will adversely impact PETDAG (Sell, TP: RM21.90).

Measure 4: Support the hybrid solar energy generation as well as construction of a network of electricity transmission line in Southern Sabah.

According to Natural Resources, Environment, and Climate Change (NRECC) Minister Nik Nazmi in May 2023, the East coast of Sabah is operating with a 30% reserve margin deficit, in contrast to its West coast's excess 48%. The construction of electricity transmission line in Southern Sabah which is situated in the East coast will allow more electricity transmission from West coast to Southern Sabah. RANHILL (Buy, TP: RM0.70) is the prime beneficiary as the group currently has 2 power plants with a total of 380MW power generation capacity in the West coast of Sabah.

Measure 5: Allocates RM1.1bn to solve water supply issues in Kelantan, Sabah and Federal Territory of Labuan.

Some of the potential beneficiaries are ENGTEX (Not Rated) and YLI (Not Rated) that manufacture pipes for waterworks. Additionally, RANHILL (Buy, TP: RM0.70) is expected to benefit as the group provides non-revenue water (NRW) management services to reduce leakages of water.

Measure 6: Provide RM2bn fund to facilitate National Energy Transition. Measure 7: Continue the Corporate Green Power Programme (CGPP) as one of the implementation methods of third-party access (TPA) model.

Measure 8: Extend the offer period for Net Energy Metering (NEM) until 31 December 2024 (from 31 December 2023 previously).

Measure 9: Install solar panels at government buildings in collaboration with TENAGA and Gentari.

Measure 10: Developing a solar rooftop leasing programme with minimum cost implications.

Extension of offer period for NEM and more quota allocation for TPA under CGPP will encourage the installation of solar panels. Note that the quota balance for NEM3.0 is at 22.7%. Meanwhile, development of rooftop leasing programme would catalyse the growth of residential rooftop solar. We expect solar EPCC players such as SLVEST(Not Rated), SUNVIEW(Not Rated), SAMAIDEN( Not Rated), and PEKAT(Not Rated) to benefit from these measures. TENAGA (Buy, TP: RM11.00) would also benefit as the key rollout partner for solar panels at government buildings.

Recommendations

We are mildly positive on the Budget 2024 measures. Nonetheless, we are disappointed that the exact mechanism for RE exchange hub has yet to be finalised given the looming deadline for Singapore’s RFP2 to Appoint Licensed Electricity Importers. Maintain Overweight on P&U sector as we believe companies within the sector will gain exciting earnings growth opportunities as they embark on Malaysia’s energy transition aspirations. Further upside catalyst for the sector will be from the finalisation of Malaysia’s RE exchange hub, hopefully by the end of this year.

Source: TA Research - 17 Oct 2023