Kenanga maintains 'neutral' on utilities, names YTL Power as top pick

KUALA LUMPUR (June 8): Kenanga Research maintained its "neutral" rating of the utilities sector for its earnings defensiveness and decent dividend yields of 4% to 6%.

The research house in a note on Thursday (June 8) said the sector’s results for the first quarter ended March 31, 2023 (1QCY2023) were largely within expectations, with half of the stocks under its coverage universe meeting its forecasts, while one outperformed and two underperformed.

“The 1QCY2023 results are a testament to the earnings defensiveness of regulated assets, while variances, either upside or downside, came largely from non-regulated assets,” it added.

Kenanga said the outperformer was YTL Power International Bhd (outperform; target price [TP]: RM1.48), which reported yet another set of upbeat results driven by the strong performance of PowerSeraya.

Meanwhile, easing fuel prices at present are positive for Tenaga Nasional Bhd (outperform; TP: RM10.64) and Petronas Gas Bhd (market perform; TP: RM17.13), but negative for Gas Malaysia Bhd (market perform; TP: RM3.54). Nonetheless, the impact is neutral over the long term given the fuel cost pass-through mechanism.

Kenanga said there were no major surprises in the recent 1QCY2023 results season, with 17%, 50% and 33% coming above, within and below its forecasts, as opposed to 17%, 67% and 17% in the preceding quarter.

“YTL Power was the only outperformer again, with its results for the cumulative nine months ended March 31, 2023 (9MFY2023) beating our forecasts yet again, due to the stronger-than-expected performance of its Singapore IPPs (independent power producers),” it added.

However, it said, Malakoff Corp Bhd’s (outperform; TP: 80 sen) 1QFY2023 results disappointed, with wider losses on fuel margin loss, as its weighted average coal cost came in higher than the applicable coal price as coal prices declined sharply.

Samaiden Group Bhd’s (outperform; TP: RM1.15) 9MFY2023 results also fell short of expectations on higher-than-expected staff cost and professional fees, and listing expenses.

Kenanga said YTL Power remains its sector top pick, due to promising prospects for PowerSeraya, defensive Wessex Water earnings, and its exciting data centre and digital banking ventures.