Kenanga Investment opines that the annual electricity demand growth rate of 1.8% in Peninsular Malaysia in CY23 and CY24, will be largely driven by the recovery in the industrial sector, which is slightly higher than the guided growth of 1.7% under the Regulatory Period 3 parameter. However, the number could accelerate under the upcoming Regulatory Period 4 over 2025-2027 driven by five new data centres that will come online over the next 12 months. These data centres will consume about 2,000MW of electricity (against TENAGA’s current domestic installed capacity of 18,183MW) on which the incumbent power supplier is well-positioned to capitalise given its reserved margin of 40%. Also, a higher transmission and distribution capex for the transmission and distribution of RE will increase its regulated asset base, resulting in higher absolute earnings based on a return pegged to WACC (7.3% WACC for RP3).
The recently-announced NETR lays down the pathway for Malaysia’s net zero goal by 2050. A key initiative is the transition to RE with a target of RE making up 70% of the total generation mix by 2050. To meet the target, the house estimates that at least 20GW of RE will need to be added to the system by 2050, of which >90% is expected to come from solar. Meanwhile, the lifting of the export ban on RE and the establishment of a centralised electricity exchange operated by a single market aggregator to ensure pricing transparency will provide further growth impetus to the local RE sector. TNB will benefit from; (i) RE generation, particularly solar as well as re-powering of Paka and Kapar power plants into hydrogen-fired plants, and (ii) investment in grid infrastructure for the transmission and distribution of RE that fetches a regulated return.
TENAGA’s Imbalance Cost Pass-Through (ICPT) receivables fell sharply by 47% to RM8.9b as of June 2023, off the peak from the all-time high of RM16.9b as at Dec 2022. Given the persistent downtrend in the fuel price, its guide for its ICPT receivable is to fall to RM7b in 1HFY24. The shrinking ICPT receivables will result in lower working capital requirements and hence lower interest expenses and better earnings going forward.
While the movement of gas prices has neutral impact in the longer run given the regulated framework, the current declining gas price trend has a positive impact on PETGAS in the immediate term as low gas price leads to lower internal gas consumption for its regulated business as well as non-regulated utilities segment. The utilities segment uses gas as fuel to generate and supply power, stream, and industry gasses to industries. However, weaker gas prices work against GASMSIA’s non-regulated retail margin which is calculated based on a fixed percentage of gas selling price. On the other hand, YTLPOWR’s solid earnings from PowerSeraya is expected to be sustained at least in the next 2-3 years underpinned by: (I) favourable retail prices but gas input locked in at low prices (during the early part of the pandemic), and (ii) the absence of major capex.
Given the declining trend of fuel prices, Kenanga expects the earnings of players to end the year on a high note, with the exception of GASMSIA as the weakening of gas prices would result in a weaker retail margin as mentioned above. PETGAS should benefit from lower input cost as gas price weakens. Meanwhile, the house raises its FY24-25F earnings for YTLPOWR by 15%-16% to RM2.17b and RM2.06b, respectively, to reflect its sustained low input cost.
Accordingly upgrade TP for YTLPOWR by 17% to RM2.50 (from RM2.14), having also reflected the upwards earnings revisions as mentioned.
