CGS-CIMB Research retains overweight on utilities

“We see Tenaga (TNB), Malakoff and Cypark as beneficiaries from the opportunities in RE, while TNB should benefit from the additional investments in grid," says CGS-CIMB Research.

KUALA LUMPUR: CGS-CIMB Equities Research is retaining its overweight on the utilities sector as the 12th Malaysia Plan (12MP) initiatives under reaffirms its view that renewable energy (RE) capacity will grow strongly.

In a research note on Tuesday, it expected more investments in grid systems are needed to facilitate energy transition towards a low-carbon nation.

“We see Tenaga (TNB), Malakoff and Cypark as beneficiaries from the opportunities in RE, while TNB should benefit from the additional investments in grid.

“Gas players, such as Petronas Gas (PGB) and Gas Malaysia, will likely benefit from the higher domestic gas demand, in our view,” it said.

CGS-CIMB Research said it maintained its overweight on the sector as it expects (i) stronger EPS growth for the sector in CY21-22F vs CY20, (ii) its undemanding CY21F sector average P/E of 13.6 times versus 16.6 times in CY20, (iii) decent dividend yields of c.5%, (iv) limited foreign outflows as foreign shareholdings are near historical lows, and (v) overplayed Environmental, Social, and Corporate Governance (ESG) concerns as it sees growth potential from ESG.

“TNB and PGB are our top sector picks. Key downside risks: political instability and more power reforms in the pipeline,” it said.

CGS-CIMB Research said under the 12MP (2021-2025), the government will be advancing sustainability to strike a balance between socioeconomic development and environmental sustainability, in order to fulfil Malaysia’s commitment to the Paris Agreement of reducing greenhouse gas (GHG) emissions by 35%-45% (based on emissions intensity in 2005) by 2030F.

A Nationally Determined Contribution roadmap will be developed to create mitigation action plans, which specify the amount of emissions that need to be reduced from each of the key greenhouse gas (GHG) emitting sectors.

A feasibility study will be conducted on carbon pricing, such as carbon tax and the Emission Trading Scheme. Malaysia is also liberalising the gas market to create a sustainable gas industry and ensure the security of supply in a bid to become a regional gas market hub.

The electricity subsector will be enhanced by: (i) creating a resilient electricity supply industry that is more digitalised, future-proof and transparent, (ii) strengthening Sabah’s electricity supply system via upgrading of generation/transmission facilities and introduction of incentive-based regulation (IBR) framework, (iii) enhancing the grid system to ensure security of electricity supply by investing in generation capacity and reinforcement of transmission/distribution networks, (iv) expanding rural electricity coverage to achieve target of 99% electricity coverage in rural areas, (v) increasing RE installed capacity to meet target of 31% renewable energy (RE) of capacity mix by 2025F, and (vi) enhancing energy efficiency (EE) to ensure prudent use of energy.

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