Utilities on positive trajectory as power demand stays strong

HLIB Research maintained its “overweight” call on the sector, citing earnings and dividend sustainability.

PETALING JAYA: The utilities sector in Malaysia is expected to continue on a positive trajectory in the second half of this year (2H24).

This is driven by the anticipated growth in electricity demand in country, while the incentive-based regulation (IBR) and imbalance cost pass-through (ICPT) frameworks are expected to remain stable, according to Hong Leong Investment Bank (HLIB) Research.

In a report, the research firm said stabilising commodity fuel prices have improved the earnings feasibility for the sector, which is the key beneficiary of data centre development in Malaysia.

Given the optimism, HLIB Research maintained its “overweight” call on the sector, citing earnings and dividend sustainability.

Its top pick is YTL Power International Bhd, with a target price of RM7.45, while it reiterated “hold” on Tenaga Nasional Bhd (TNB) at RM13.30 and Petronas Gas Bhd (PetGas) at RM18.

“The utilities sector is expected to sustain into 2H24, as IBR/ICPT frameworks remain intact and demand for utility products continue to increase in tandem with the ongoing economic revival,” HLIB Research said.

“Stabilising commodity fuel prices (since 2H23) have improved the earnings feasibility for the sector, which is also the key beneficiary of data centre development in Malaysia,” it added.

The research house noted that the ICPT framework remained intact with its latest sum, estimated at RM4.6bil, being approved for 2H24, with TNB expected to recoup through government subsidies RM2.2bil and tariff surcharges to end users.

Similarly, it said, the IBR framework for PetGas (gas transportation and regasification) remained effective with higher adjusted rates for gas transportation and the regasification terminal in Sungai Udang, Melaka, and lower rate for the regasification terminal in Pengerang, Johor, effective 2024.

HLIB Research said the emergence of Malaysia as a data centre hub in South-East Asia would also buoy the utilities sector, with TNB and YTL Power being the major beneficiaries.

Specifically on its top pick, YTL Power, HLIB Research said the company’s stock valuation remained undemanding with continued earnings growth.

This is underpinned by direct investment into green-powered data centre hub and artificial intelligence cloud infrastructure, supported by US-headquartered Nvidia Corp.

As for TNB, HLIB Research said earnings potential would leverage onto the step up in regulated asset base following higher allowable capital expenditure (capex) in tandem with higher power demand.

“Recent ICPT for 2H24 approval signifies government’s ongoing refinement on the ICPT while easing government’s burden on subsidies.

“TNB is currently in discussion on the upcoming Regulatory Period 4, or RP4, determination (2025-2027),” it said.

It said TNB had guided a huge capex spending of RM90bil for the 2025-2030 period to support the nation’s net-zero emission goal by 2050.