The utilities sector’s earnings delivery during the recently concluded 4QCY23 results season failed to excite with 60% and 40% coming in within and below forecasts, as opposed to 40%, 20% and 40% beating, meeting and missing in the preceding quarter says Kenanga in its report of the sector.
Mainly highlighting Tenaga where its 4QFY23 results were hit by high fuel cost while MALAKOF reported a huge share of losses from its 40%-owned associate Al Hidd Independent Water and Power Producer in Bahrain pursuant to an accounting adjustment on the basis that there will be no further extension to the concession. Meanwhile, the 2QFY24 results of YTLPOWR and the 4QFY23 results of GASMSIA and PETGAS were largely within expectations.
Despite the weak numbers from TENAGA and MALAKOF, we believe their long-term earnings resilience is intact backed by their regulated assets. With coal prices stabilising, TENAGA saw its first positive fuel margin in 4QFY23 since 4QFY22 while the latest Imbalance Cost Pass-through (ICPT) under-recovery of RM2.11b was 67% off the peak of RM6.40b in 4QFY22. Similarly, MALAKOF also reported first positive fuel margin in a year as coal prices stabilised. On the other hand, PETGAS did not face high internal gas consumption (input cost) like in the past quarters for its regulated business as well as non-regulated utilities segment.
In fact, its utilities segment benefited from the upward revision of ICPT surcharge. Meanwhile, GASMSIA posted higher earnings largely due to higher sales volume but its margins were compressed as gas prices declined. Similarly, YTLPOWR still posted strong quarter but with a 9% QoQ decline as PowerSeraya’s earnings peaked as retail prices normalised.
The house is downgrading the sector recommendation to NEUTRAL from OVERWEIGHT following its downgrade on TENAGA. However, it continues 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 3%-6%. Sector top pick is YTLPOWR given its geographically diversified regulated asset base, strong near-term earnings prospects of PowerSeraya backed by gas inventory locked in at low prices and its long-term growth potential driven by its data centre and digital banking ventures.
