PETALING JAYA: The weakening fuel prices are largely a boon for utility companies, says Kenanga Research.
In a sectoral report, the research firm believes fuel costs for coal and gas have peaked in the final quarter of 2022 (4Q22) based on the fact that the Indonesian benchmark coal price has retracted by 5% year-to-date to an average of US$291 (RM1,287) per tonne from US$307 (RM1,358) in 4Q22.
The research firm opined the decrease in fuel prices bodes well for the country’s largest electricity provider, Tenaga Nasional Bhd (TNB).
Due to the decreased fuel prices, TNB gas guided for a lower imbalance cost pass through (ICPT) of RM12bil in the second half of 2023 (2H23) against RM16.2bil in 1H23.
“TNB will fully recover the amount from a 20 sen per kilowatt hour (kWh) ICPT surcharge from non-domestic customers and a RM10.4bil payment from the government,” the research house explained.
Kenanga Research said this will result in TNB’s ICPT receivables declining to RM12bil by June 2023, from RM16.9bil in 4Q22.
“A strong cash flow will help to bring down TNB’s debts and interest serving costs. Recall, TNB was hit by high borrowing cost in 4Q22, as it resorted to short-term borrowings to fund working capital due to ballooning under-recovery of fuel cost,” it added.
Kenanga Research has projected electricity demand to grow 1.8% in 2023, largely driven by the recovery in the industrial sector in Peninsular Malaysia.
Additionally, the lower gas prices are positive to Petronas Gas Bhd or PetGas, as its non-regulated business, namely, the utilities division, uses gas as fuel to generate and supply power, steam and industries gasses to industries.
O the flip side, Kenanga Research said weaker gas prices worked against Gas Malaysia Bhd, as its retail margins are calculated based on a fixed percentage on the gas price.
The brokerage remained “neutral” on the utilities sector as it believes most key stocks are fully valued.
Currently, six stocks within the utilities sector under Kenanga Research’s coverage including the aforementioned companies, trade at an average of 12.5 times one-year forward price to earnings (PE) multiple.
“Having said that, the sector offers earnings defensiveness, particularly due to their regulated asset base model, and hence, recurring dividends for yield seekers,” it noted.
Kenanga Research has named YTL Power International Bhd as its top pick under the utility sector, owing to improved earnings prospects with the turnaround of PowerSeraya, and Wessex Water’s resilient earnings, which should anchor a dividend yield of about 6%.
It believes PowerSeraya will continue to drive YTL Power’s earnings.
It expects Malakoff Corp Bhd to post improved earnings after having completed the low-pressure turbine blade failure repair works in February 2022 at its 1,000MW coal-fired Tanjung Bin Energy plant.
The research house pointed out the failure had resulted in unplanned outages from 4Q21 to 1Q22.
“On the other hand, Samaiden Group Bhd is expected to see a stronger 2H23 on accelerated progress billings from its order book of about RM325mil that will keep it busy for the next three years,” it stated.