Kenanga Research expects better earnings stability at YTL Power, given more sustained profitability at subsidiary PowerSeraya.
KUALA LUMPUR: The utilities sector continues to be attractive for its earnings defensiveness, which is backed by resilient earnings from regulated assets, while recurring cash flows also anchor decent yields of 4% to 5%, according to Kenanga Research.
“The fourth quarter of 2022 (4Q22) results season spoke eloquently yet again for earnings resilience of regulated assets while variances (both upside and downside) came largely from non-regulated assets,” said the research house.
Regarding 4Q22 results season, Kenanga Research said YTL Power International Bhd
was the only outperformer with its first half ended Dec 31, 2022 (1H23) results beating its forecasts yet again.
“This was due to stronger-than-expected performance of its Singapore independent power producers and consistently higher associate income, primarily from its 20% stake in PT Jawa Power, which owns a 1,220MW coal-fired power plant in East Java, Indonesia,” it added.
However, it said Tenaga Nasional Bhd’s (TNB) 2022 results was disappointing due to higher interest costs as its total debt rose to partly finance the rising imbalance cost pass-through (ICPT) receivables.
While TNB’s ballooning under-recovery of fuel costs with ICPT receivables hit a record high of RM16.9bil from RM15.5bil in 3Q22, the research house is not perturbed as this will eventually be recovered under the incentive-based regulatory (IBR) framework.
TNB will fully recover the net imbalance cost via the ICPT surcharge of 20 sen per kWh pass-through to non-domestic customers, and RM10.4bil cost recovery from the government.
Similarly, over 90% of Petronas Gas Bhd’s earnings are safeguarded by the IBR framework, while Gas Malaysia Bhd will continue to benefit from the high gas prices at its non-regulated retail unit.
“We also expect better earnings stability at YTL Power, given more sustained profitability at subsidiary PowerSeraya, the second-largest power generation company in Singapore in terms of installed capacity, and Malakoff Corp Bhd as the 1,000MW coal-fired plant under Tanjung Bin Energy is back online after repair works,” it said.
Meanwhile, Samaiden Group Bhd is a poster child of the renewable energy adoption in Malaysia as the recent electricity tariff hikes have significantly increased the viability of solar power as an alternative energy source, boosting investment in solar infrastructure.
Kenanga Research said while the bigger caps are largely rated “neutral”, YTL Power is its sector top pick, backed by the turnaround of PowerSeraya and earnings defensiveness of subsidiary Wessex Water, one of the most efficient water and sewerage operators in the United Kingdom.
Wessex Water is a utility concession in perpetuity.
