• Still OVERWEIGHT; Top Picks: Tenaga Nasional (TNB), YTL Power (YTLP), and Samaiden. Our sector call is largely premised on: i) The surge in data centre (DC) developments, which will ramp up electricity consumption growth; ii) continued power grid upgrades, which will increase regulated net returns; iii) experienced independent power producers (IPPs) bridging the supply gap; and iv) domestic renewable energy (RE) capacity additions anchoring contractors’ job flow.

• Another decent quarter. In the recently concluded reporting period, seven companies under our coverage released their 2Q24 results. Four booked numbers within estimates, while two big caps beat expectations, and one disappointed. The two outperformers were TNB and YTLP. TNB exceeded expectations due to better-than-expected contribution from TNB Power Generation and higher-than-expected revenue, while the positive deviation of YTLP’s results was led by better-than-expected contribution from Wessex Water and the telecommunications division. The only disappointment was Ranhill Utilities due to the weaker-than-expected performance of its engineering services and power divisions.

• Strong demand ahead. Electricity demand hit a new peak of 20,066MW in July. At TNB’s analyst briefing held early this month, management lifted its annual demand growth guidance to 3-4% from 2.5-3%, primarily due to stronger commercialisation of DCs. As of 1H24, there have been 26 electricity supply agreements (ESA) signed, contributing to a total maximum energy demand of c.4GW. Of the 16 completed projects with cumulated demand of 1.6GW, there was about 190MW of load utilisation in June, contributing c.MYR100m sales for TNB.

• Expecting more supply as well. TNB estimates up to 5GW of additional RE into the grid under various programmes including the Corporate RE Supply Scheme (CRESS), Large-Scale Solar 5 (LSS5), and Corporate Green Power Programme (CGPP). We anticipate increased activity in 2H, driven by upcoming CGPP EPCC contracts and the launch of the CRESS framework in September. Despite concerns on high system access charges (SAC) and its impact on securing off-takers, CRESS is expected to boost the green power market. Also, the announcement of LSS5 winners is anticipated in 4Q24 or 1Q25. We maintain our view that the solar sector is poised for growth, supported by low panel prices and a stronger MYR, positioning players for steady expansion and diversified portfolios. Interestingly, Malakoff believes coal will remain relevant over the next decade, and that existing coal plants will have to be extended in the medium-term post power purchase agreement (PPA) expiry if there are insufficient gas plant additions. Even if there is new gas capacity, cost of generation would be higher, as new gas molecules will have to be imported at market prices. Higher gas import reliance may also heighten supply sustainability risks in the long run, depending on where it is imported from.

• Risks: Lower-than-expected new RE capacity rollouts, and higher-thanexpected operating costs.

Source: RHB Securities Research - 18 Sept 2024