Earnings of utility firms likely to be sustained

PETALING JAYA: Utility companies are expected to sustain their earnings growth into the second half of the year (2H23) as demand for their services continue to increase in line with the ongoing economic recovery.

The decreasing commodity fuel costs will improve Tenaga Nasional Bhd’s (TNB) cash flow and Petronas Gas Bhd’s (PGB) earnings, according to Hong Leong Investment Bank (HLIB) Research.

YTL Power International Bhd (YTL Power) will benefit from the higher retail tariff mix in Singapore and higher uniform Singapore energy prices in the coming quarters as well as the turnaround of its Wessex Water asset (following 9% hike in average tariff) and new Attarat oil shale power plant contribution in Jordan, said the research house.

This could potentially ensure higher dividend payout for YTL Power (given the stronger profits and cash flow) to 15 sen a share (yielding 11.9%) in financial year 2024 to 2025 versus the house’s conservative assumption of only eight sen a share.

RHB Research said both TNB and PGB would offer decent yields of 5.5% to 6.6% and 4.4% to 4.7% respectively.

It maintained its “overweight’’ rating for the sector with top picks being TNB (target price (TP) of RM12 a share) and YTL Power (TP: RM2.05 a share).

It said the majority of TNB’s and PGB’s earnings are relatively stable except for quarterly fluctuations, protected under Incentive Based Regulations/Imbalance Cost Pass-Through (IBR/ICPT) framework and long term contracts/agreements.

It did not expect the government to backtrack its commitment on the implemented IBR/ICPT mechanisms as the exercise will undermine investor confidence towards the government’s other existing and future policies.

The research house added YTL Power has been reporting strong earnings growth for the past quarters, driven mainly by higher average retail tariff mix. It expects YTL Power’s earnings to continue its growth momentum in coming quarters.