• Keep OVERWEIGHT, Top Picks: Tenaga Nasional (TNB), YTL Power, and Samaiden Group. A year after the launch of the National Energy Transition Roadmap (NETR), we remain positive on the utilities sector. This is premised on: i) The mushrooming number of data centre (DC) developments, which will ramp up the growth in electricity consumption; ii) continuous power grid upgrades, which will increase regulated net returns; iii) experienced independent power producers (IPPs) bridging the supply gap; iv) domestic renewable energy (RE) capacity additions anchoring contractors’ job flow.

• Decent progress seen a year after NETR launch. There is solid progress for the key initiatives mentioned under the NETR. The recent introduction of the Corporate Renewable Energy Supply Scheme (CRESS) is crucial for pushing the third-party access (TPA) mechanism through, in order for it take effect. The establishment of Energy Exchange Malaysia (ENEGEM) is also important to facilitate energy exports to Singapore. Multiple solar power programmes continue to be rolled out and executed while feasibility studies on biomass clustering, co-firing of ammonia and hydrogen are ongoing.

• The DC fiesta. West Malaysia’s electricity consumption growth over the next decade is expected to surpass the 10-year average of 2.4%, led largely by the continuous expansion of DCs. We see DCs’ energy consumption alone having a CAGR of 1.6-2.6% between 2023-2035, if 3-5GW of DCs are to be fully operational by 2035. The Government has projected the reserve margin at 28-36% for 2024-2030. To accommodate such strong demand, we understand that there are on-going 1+1-year short-term power purchase agreement (PPA) bids for the near term. We do not discount the possibility of PPAs being extended for gas-fired plants, and believe IPPs that are experienced in running gas-fired power plants – such as TNB and Malakoff Corp – should benefit from additional gas capacity expansions in the long run (to replace coal).

• Regulatory Period (RP) 4 expectations. Pending the RP4 outcome – which is expected to be known by the year-end – we may see some restructuring in tariffs to account for new initiatives such as energy exports, as well as wheeling charges collection under the TPA mechanism. We estimate average regulated capex to increase by 25-40% vs RP2 levels, to MYR8.6-9.6bn pa with higher annual demand growth of 3-4% and an unchanged WACC of 7.3%. Based on our sensitivity analysis, regulatory net returns should increase by1.34% for every MYR1bn hike in average capex pa.

• Solar play remains. Ongoing government policies and initiatives, coupled with declining panel prices, should sustain growth in the solar power segment – evidenced by the rapid progress of large-scale solar (LSS) projects after a stagnant four quarters. With the Corporate Green Power Programme (CGPP) EPCC awards coming up, followed by the shortlisting of bidders for LSS 5 and the rollout of the CRESS and ENEGEM, there is significant potential for solar EPCC players’ earnings to continue growing. Downside risks: Lowerthan-expected new RE capacity rollout, major regulatory changes, and higher-than expected operating costs.

Source: RHB Securities Research - 20 Aug 2024