‘Overweight’ rating on utilities

PETALING JAYA: Kenanga Research has maintained its “overweight” recommendation on the utilities sector due to its defensive earnings capabilities, especially for those operating in the regulated space.

The research house said the sector saw a slight sequential improvement in its second-quarter (2Q) results, with earnings resilience seen in the regulated assets while variances both upside and downside came largely from the non-regulated part of the business.

“(The industry’s) recurring cashflows will anchor dividend yields of 4% to 5%.

Tenaga Nasional Bhd (TNB) is our top pick premised upon it being a reopening play, its risk premium easing as energy prices come off their peaks and it being a beneficiary of the return of foreign investors, given its significant weighting in key indices,” the research house said a report.

This is despite TNB’s 2Q earnings coming in below Kenanga Research’s expectations, as the house had underestimated the impact of the prosperity tax and the timing difference between the actual fuel costs incurred versus the fuel costs entitled under the imbalance cost-pass-through (ICPT) mechanism.

While there are concerns over TNB’s ballooning under-recovery of fuel costs, Kenanga Research said it was not perturbed as the power utility will eventually recover this under the incentive-based regulatory (IBR) framework.

Overall, the sector’s 2Q results were positive with some 29% of companies beating Kenanga Research’s expectations while the same percentage came within its forecast and 43% underperformed as compared to 17%, 17% and 67%, respectively, in the preceding quarter.

It said Gas Malaysia Bhd’s (target price or TP: RM3.43) first half (1H22) earnings beat its forecast on strong gas prices that lifted retail margins.

Similarly, YTL Power International Bhd’s (TP: 97 sen) FY22 results exceeded projections largely due to strong contributions from its associate PT Jawa Power in Indonesia.

Meanwhile, Petronas Gas Bhd or PetGas’ (TP: RM17) 2Q results were weighed down by higher fuel cost and a weaker ringgit.

Kenanga Research said over 90% of PetGas’ earnings are safeguarded by the IBR framework.

It expects Gas Malaysia to benefit from the high gas prices at its retail unit.

The research house also noted that Malakoff Corp Bhd’s (TP: 90 sen) 1H22 and Samaiden Group Bhd’s (TP: 86 sen) FY22 results met its expectations.

“We foresee better earnings stability at YTL Power on more sustained profitability from its PowerSeraya and Malakoff, as its 1,000MW coal-fired plant under Tanjung Bin Energy is back online after repair works,” Kenanga Research said.

It added that Samaiden looks set to benefit from the adoption of renewables in Malaysia.

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