Kenanga Research has made an overweight call for the utilities sectors adding that this sector was a good investment avenue for investors looking for defensive earnings with decent yield incomes.
It said that even during this pandemic time, utilities players are still producing resilient earnings thanks to a regulated/concession mechanism that also ensures sustainable dividend payout.
It said that TENAGA is entering a new RP3 in 2022 which based on past trends should see a lower rate of return but is unlikely to affect its earnings negatively given the growing RAB value.
Meanwhile, gas utilities PETGAS and GASMSIA are in their final year of RP1 and we still expect resilient earnings even in the coming RP2. On the other hand, the prospect for YTLPOWR has turned brighter with the turnaround of PowerSeraya and YES’ losses narrowing.
MALAKOF also saw the normalisation of IPP earnings with planned outages fully completed. In all, we continue to rate the sector an OVERWEIGHT for the players’ defensive earnings.
On stocks, Kenanga said that despite the effort to address the ESG issue, TENAGA (OP; TP: RM11.41) saw its share price falling to a 52-week low again recently as foreign funds turned net seller again, after merely two months of net buying in Aug and Sep, as overall market sentiment turned negative again.
Nonetheless, it said besides expanding its RE portfolio, aiming to reduce its dependency on coal-fired plants by 50% capacity by 2035 before being coal-free by 2050, TENAGA continues to demonstrate its earnings resiliency which is backed by the IRB framework even during this COVID-19 period. “2022 will be under a new RP3 for three years until 2024,” it said
On Gas utilities, Kenanga said that both PETGAS (MP; TP: RM17.02) and GASMSIA (OP; TP: RM3.00) have so far demonstrated earnings resiliency even during this pandemic period, thanks to the IBR framework which safeguards their earnings.
It said that in fact, GASMSIA reported solid results in this RP1 period which started in 2020, attributable to stronger-than-expected margin spread partly due to new retail margin.
Kenanga said that apart from a mild impact on MALAKOF (OP; TP: RM1.01) arising from the one-off prosperity tax, both IPPs MALAKOF and YTLPOWR (OP; TP: RM0.89) will continue to see their stable earnings extending into 2022 and beyond.
It said that this was demonstrated in 2021 after MALAKOFF reported normalised local IPP earnings in 2021 from planned and unplanned outages in 2020 while YTLPOWR reported three upbeat quarterly results out of four results in the past year due to the turnaround of PowerSeraya on an improved business environment in Singapore and continued narrowing losses from YES as higher subscribers base boosted economies of scale.