• Performance Recap in 2024. The KL Utilities index (KLUTL) has surged 32% YTD (until closing 27th December) with current market cap of RM203bn. Among the top 3 key constituents include Tenaga, YTL Corporation and YTL Power International. Notably, the said index hit its 52 weeks high in early July 2024 to a value of 1,900. We think these trajectories were led by the i) 7.6% YoY growth in Peninsular Malaysia’s sales of electricity for 9M2024 (vs 9M2023: 96.8GWh) thanks to elevated commercial and domestic sector demand, ii) stabilization in fossil fuel (coal and natural gas) prices movement that narrowed fuel margin losses, and iii) the Third-Party Access (TPA) introduction in power sector during the year.

• Growing Power Demand from Data Center (DCs). Companies began looking at Malaysia to set up their DCs since early 2000s due to its strategic location in Southeast Asia (SEA), low risk of natural disaster and electricity tariff (33.7 sen/kWh and 20.2 sen/kWh during peak and off-peak period), tax incentive and land availability. As of Sep 2024, about 31 DCs projects secured under Tenaga which require a total maximum demand of 4.7GW, of which 17 project in system for 1.7GW. Additionally, we believe DCs is among contributor to the recent Peninsular grid system new peak demand at 20,066MW in July 2024, surpassing the initial projections of 19,365MW in 2025 and approaching 20,755MW in 2030. As DCs operated with load utilization (actual 248MW as Sept 2024), we foresee the remaining power usage is set to gradual increase over quarters. Tenaga projected about 10 projects worth 2,000MW is expected to load up from 2025, with the maximum electricity demand to exceed 5GW by 2035. Overall, the group received 74 supply applications from DCs customers with total maximum demand of more than 11GW (or c.41% of Peninsular Malaysia's installed capacity). While we understood that DCs is the proxy to Tenaga, however we acknowledged that not all project is expected to be executed due to its energy guzzling nature with country’s tight reserve margin available for the next 5-10 years.

• Upcoming Regulatory Period 4 (2025-2027) framework for Tenaga. Recently, Tenaga stated that it proposed new tariff schedule with a base tariff of 45.62sen/kWh (+14.2% from RP3 base tariff) for Peninsular Malaysia starting July 2025. Nevertheless, we noted that PETRA are still in the process of finalizing the new tariff for 2H25 onwards. Inline with NETR ambition, Tenaga guided that regulated business CAPEX has been set at RM42.8bn (RP3: RM20.6bn), while operating expenditure (OPEX) is set at RM20.9bn (RP3:RM17.7bn). Although RP4’s regulatory rate of return is to maintain at 7.3%, we still view this positively to its widening Regulated Asset Base (RAB) moving forward propelled by transmission and distribution assets upgrade. In view of RP4 tariff, we deemed PETRA to agree that tariff should be revised slightly higher from 2H2025 onwards (except for domestic monthly user electricity consumption of at or below 1,500kWh) to support the need of massive investment for grid upgrade and battery storage system. PETRA forecasted that coal prices for the RP4 to stand at US$97/MT (or RM433.80/MT), while for monthly gas usage up to 800mmscfd, the floor price is set at RM24/MMBtu with ceiling price at RM35/MMBtu. On gas players front, its second regulatory period (RP2) will conclude by the end of 2026. We believe the gas players will benefit from the long-term spill over effects of power sector reforms, as natural gas is expected to serve as a transition fuel.

• Third Party Access System (TPA) Initiatives to Spur Power Capacity. In September 2024, Malaysia introduced TPA framework which enable Independent Power Producers (IPPs) and solar player such as Malakoff, Solarvest and Cypark (under our coverage) to sell electricity directly to consumers, bypassing the Single Buyer (Tenaga) regime. However, it will still depend on Tenaga's transmission lines for the delivery of electricity. Following this, the Corporate Renewable Energy Supply Scheme (CRESS) is introduced in the latter with requirement of minimum plant capacity of 30MW, with varies System Access Charge (SAC) or wheeling charges. The SAC is set at 25sen/kWh for firm output (with Battery Energy Storage System (BESS)) and 45sen/kWh for non-firm output (without BESS). Noted that SAC will be reviewed every regulatory period of 3 years. Recently, Tenaga embarked its first project under CRESS where it signed a 400MW of Electricity Supply Agreement (ESA) with MY07 Bridge Data Centres (BDC) in Johor. Overall, we like the initiative as it will benefit these players to gain new avenue for growth and higher tariff returns as opposed to EC/SEDA tender.

• Thriving EPCC Jobs for Solar Player in 2025. Solar player is expected to benefit from flourish EPCC jobs for the next two years with replenishment of remaining CGPP orderbook, 2GW LSS5 project and initial development of the first stage (500MW) of Hybrid Hydro Floating Solar (HHFS) at Tasik Kenyir. Noted that CGPP need to be completed by end of 2025 while LSS5 and first stage of HHFS by end of 2026. Assuming a contract worth RM3mn per MW, LSS5 alone could potentially give a RM6bn worth of EPCC jobs. Additionally, the downward price trend as well as insignificant impact from US import duties on solar panels from Southeast Asia (since most Malaysian solar players import them from China), will contribute to a better net margin. Therefore, we remain upbeat on Solarvest’s prospects in growing its orderbook (RM961mn to date) and asset base expansion amid strong demand for RE. Notably, Malaysia awarded about 7.2GW of solar project within the past 12 years.

• Risks. The energy transition (ET) capital expenditures remain high, presenting a significant financial challenge. Additionally, Malaysia possessed a tight reserve margin (currently at 31% while about 9.7GW power plant is waiting to retire between 2024 to 2030, according to 2020 Peninsular Malaysia Generation Development Plan). The country also is facing an insufficient natural gas supply to support ET plans. Regulatory risks, including potential changes to tariff structures, add further uncertainty. Geopolitical tensions are also exacerbating commodity price volatility, while rising interest rates could increase borrowing costs, particularly for infrastructure projects that are often financed through debt.
  
  Maintain OVERWEIGHT on Utilities sector. Reiterate our OVERWEIGHT stance on the sector with a BUY call recommendation for Tenaga (TP: RM17.84), Malakoff (TP: RM1.38), Solarvest (TP:RM2.23) while a HOLD call for Petronas Gas (TP: RM16.75), and Gas Malaysia (TP:RM4.01).

Source: BIMB Securities Research - 02 Jan 2025