We maintain our NEUTRAL recommendation given the sector’s earnings defensiveness, modest growth prospects and decent dividend yields. The sector’s earnings delivery (against our forecasts) during the recently concluded 1QFY24 reporting season improved sequentially, with all the stocks under our coverage either meeting or beating our expectations. Stabilising coal prices reduced earnings volatility of TENAGA (OP; TP: RM14.50) and MALAKOF (MP; TP: RM0.68) while GASMSIA (MP; TP: RM3.55) benefited from a pick-up in sales volume. Lower gas prices were a boon to PETGAS (MP; TP: RM17.87). Our sector top pick is TENAGA given the rising electricity demand from data centres.

There was a significant improvement in the sector’s earnings delivery (against our expectations) in 1QCY24 sequentially with 25%/75%/0% of companies under our coverage beating, meeting and missing our forecasts, as opposed to 0%/50%/50% in the preceding quarter.

GASMSIA’s 1QFY24 core profit topped our forecast due to higher-than-expected sales volume and a better ASP. Meanwhile, the remaining utilities companies under our coverage met our expectations. TENAGA’s 1QFY24 core profit eased 11% YoY as higher taxation more than offset a significantly lower negative fuel margin. However, despite being seasonally the weakest quarter in a year, its electricity sales (+1.3% QoQ; +9.6% YoY) in 1QFY24 was a record, driven by commercial (+11.2% YoY) and industrial segments (+3.0%). This was underpinned largely by the additional demand for electricity from two new data centres. MALAKOF returned to the black with a net profit of RM62.2m in 1QFY24 vs. a net loss of RM75.7m in 1QFY23 (during which its coal-fired power plants, Tanjung Bin Power and Tanjung Bin Energy, were hit by significant negative fuel margin). Meanwhile, PETGAS’s 1QFY24 earnings grew 11% YoY thanks to lower gas cost.

Earnings of TENAGA and MALAKOF remain resilient backed by their regulated assets, with reduced volatility on stabilising coal prices. TENAGA will be buoyed by higher electricity demand growth (we assume 3% annually over the next ten years), driven largely by new power-intensive data centres. Meanwhile, in view of strong electricity demand growth in FY22A (+6.0%) and FY23A (+3.6%), and 2.5% to 3.0% in FY24F guided by TENAGA, we expect higher demand growth assumption during Regulatory Period 4 (2025-2027), as against 1.7% during Regulatory Period 3 (2022-2024).

On the other hand, PETGAS is buoyed by the upward revision in the Imbalance Cost Pass-Through (ICPT) surcharge recently, while GASMSIA is poised for a higher sales volume (partly driven by higher demand from glove producers) but will have to come to terms with lower margins as gas prices ease.

We maintain our NEUTRAL rating on the sector as we continue to like the sector for its earnings defensiveness and resilience backed by regulated assets that generate recurring cash flow to anchor decent dividend yields of 3%-6%. TENAGA is our sector top pick for its dominance in power generation, transmission and distribution in Malaysia, its earnings defensive and new growth catalyst arising from demand for electricity from data centres.

Source: Kenanga Research - 12 Jun 2024