Resilient earnings set to continue for utility firms

Staying power: Workers installing the tower at TNB’s GIS switching station in Kuala Lumpur. Analysts say its earnings will remain consistent as long as the IBR is in place.

PETALING JAYA: Kenanga Research is maintaining its “overweight” call on Malaysian utility companies, given their defensive earnings profile and decent dividend yields.

In a report yesterday, the research house noted that the utilities sector is often perceived to be “a boring” segment, considering its “less-than-exciting gross domestic product growth-like earnings”.

“However, this helps the sector sail through economic downturns, given its regulated business environment and the Covid-19 pandemic period has indeed demonstrated such earnings defensiveness for the sector’s players.

“The regulated environment has also helped to sustain their above-average dividend yield of between 4% and 7%,” it said.

Kenanga Research noted that earnings of Tenaga Nasional Bhd (TNB), Petronas Gas Bhd (PetGas) and Gas Malaysia Bhd have been fairly resilient, having been regulated under the Incentive-Based Regulation (IBR) framework. The IBR framework promotes cost-efficient tariff structure for customers.

Additionally, the research house noted that the earnings of independent power producers Malakoff Corp Bhd and YTL Power International Bhd were backed by a power purchase agreement, with new assets helping to bridge earnings gaps.

“Meanwhile, niche utility infrastructure player Pestech International Bhd offers an exciting growth story in Cambodia, coupled with promising rail electrification contract flows in the region.”

Kenanga Research also said Pestech’s key projects in Malaysia and Cambodia were advancing into higher stages and will lead to better margins in 2022.

“Going forward, its current order book of RM2bil will keep the company busy for the next two to three years. We still like the stock as a niche utility infrastructure play,” it said.

Separately, Kenanga Research noted that the government had approved and decided to implement the Regulatory Period 3 (RP3) under the IBR from February 2022 to December 2024.

“After more than a year’s delay due to the pandemic, the RP3 for the power industry was officially started from February 2022 with an unchanged regulatory return of 7.3%.”

In light of this, the research house said TNB’s earnings will remain resilient in the future as long as the IBR is in place.

Similar to TNB, Kenanga Research noted that PetGas and Gas Malaysia have also demonstrated earnings resiliency during the pandemic, thanks to the IBR framework which safeguards their earnings.

“In fact, Gas Malaysia has reported commendable results during the RP1 period which started in 2020, which was attributable to a stronger-than-expected margin spread.”

Kenanga Research said PetGas had also registered fairly consistent earnings over the same period. “As such, both PetGas and Gas Malaysia are expected to report resilient earnings with minimal impact from the one-off prosperity tax in the last year of RP1 in 2022,” it said.

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