Utilities sector performing above expectations

Kenanga Research said TNB was its top pick as it is a long-term beneficiary of the influx of foreign direct investment to build data centres in the country.

PETALING JAYA: The utilities sector shone brightly as the earnings performance of many players in the recent second quarter reporting season exceeded expectations.

“The sector reported yet another significant improvement in earnings delivery against our expectations in the first quarter of the year,” Kenanga Research said, upgrading the sector to “overweight”.

“We continue to like the sector for its earnings defensiveness and resilience backed by regulated assets that generate recurring cash flow to anchor decent dividend yields of up to 6%,” it added.

It pointed out that the best performer was Tenaga Nasional Bhd (TNB) which was driven by plant efficiency, which boosted earnings as electricity sales reached another record high.

“We upgraded TNB’s demand growth to 3.5% from 3% over FY24 to FY35, which fell within the freshly unveiled company’s new financial year 2024 (FY24) guidance of 3% to 4%, from 2% to 3%, on the back of strong data centre rollout schedule,” the research house said.

It added that a higher demand growth should improve plant efficiency further and hence better earnings.

Kenanga Research said TNB was its top pick as it is a long-term beneficiary of the influx of foreign direct investment to build data centres in the country.

“To cater for developing data centres, higher capital expenditure, on transmission and distribution investment, is expected and this adds to fuel regulated asset base which could translate to higher earnings growth,” it added.

Meanwhile, the research house was also positive on Gas Malaysia Bhd, which benefited from improved retail margins as average selling price rose, while Malakoff Corp Bhd surpassed forecasts due to strong power generation earnings.

It pointed out that Petronas Gas Bhd’s 2Q24 earnings were flattish which met expectations where it continued to enjoy better margins on the back of lower gas cost as fuel gas price declined.

“PETRONAS Gas is buoyed by the upward revision in the Imbalance Cost Pass-Through surcharge recently, while Gas Malaysia is poised for a higher sales volume (partly driven by higher demand from glove producers) but will have to come to terms with lower margins as gas prices ease,” Kenanga Research added.

The research house’s other top pick was YTL Power International Bhd, which will continue to be watched for its artificial intelligence (AI) data centre execution.

“All eyes on YTL Power’s AI data centre delivery as the Blackwell Nvidia chip housed in the 20MW AI data centre is scheduled to be delivered in the first quarter of 2025,” it added.

“While 4Q24 results were in line, YTL Power continued to see PowerSeraya’s earnings falling due to lower margin counter-balanced with pleasant surprises in the turnaround at Wessex Water (on higher tariff) and telco unit (on construction profit),” Kenanga Research said.