Review

The Power and Utilities (P&U) sector reported results that were largely in line with expectations in 1QCY24 (Figure 2).

Only MALAKOF disappointed out of 6 P&U stocks under our coverage. MALAKOF missed expectations due to lower-than-expected share of profit from its associates.

Compared with the preceding quarter, core profit for the sector soared 24.3% QoQ mainly driven by lower non-fuel operating expenses for TENAGA (Figure 3). Compared with 1QCY23, core profit jumped 16.2% YoY supported by stellar performance at Power Seraya of YTLPOWR and turnaround at MALAKOF following the easing of negative fuel margins.

Outlook

With the launch of the National Energy Transition Roadmap (NETR), a roadmap meant to shift Malaysia from traditional fossil fuel economy into a high-value green economy, we expect P&U sector to be the major beneficiary due to the exciting earnings possibility that the roadmap presents.

In line with the NETR, Malaysia recently set up the Energy Exchange Malaysia (ENEGEM) for trading in green electricity supply to Singapore. This is a small but important step forward before the nation scales up the cross-border sale of renewable energy to Singapore where the electricity price is much higher. TENAGA should be the main beneficiary as the group can increase its interconnection grid with Singapore in the future and hence collect returns from utilisation of the grid.

Meanwhile, the government also targets to implement third party access (TPA) by allowing independent power producers (IPPs) to sell directly to consumers, bypassing their need to purchase from TENAGA. This is a positive news for IPPs and the power generation business of TENAGA, providing them with possibility of higher returns compared with competitive bidding under the large-scale solar tenders.

Recommendation

During this quarter, we upgraded MALAKOF from Hold to Buy as we roll forward the base year of valuation. MALAKOF offers an attractive dividend yield of above 6%, supported by free cash flow yield of above 20%.

All in all, we maintain Overweight on P&U sector. Our top picks for the sector are TENAGA (TP: RM14.50) and MALAKOF (TP: RM0.80) as they are both beneficiaries of the NETR.

Source: TA Research - 5 Jun 2024