PETALING JAYA: The outlook for the utilities sector remains positive following its decent financial performance in the first quarter ended March 31, 2024 (1Q24).
Kenanga Research noted that all energy stocks under its coverage either met or exceeded expectations during the quarter.
“We maintain our ‘neutral’ rating on the sector as we continue to like it for its earnings defensiveness and resilience, backed by regulated assets that generate recurring cash flow to anchor decent dividend yields of 3% to 6%,” the brokerage said in its report yesterday.
Kenanga Research named Tenaga Nasional Bhd (TNB) as its top pick, citing the utility giant’s dominance in power generation, transmission and distribution in Malaysia, its earnings defensive and new growth catalyst arising from demand for electricity from data centres.
It pegged its target price for TNB at RM14.50.
Kenanga Research said stabilising coal prices would reduce TNB’s earnings volatility, as well as that of Malakoff Corp Bhd. It rated Malakoff as a “market perform”, with a target price of 68 sen.
“Earnings of TNB and Malakoff remained resilient, backed by their regulated assets, with reduced volatility on stabilising coal prices,” it said.
“TNB will be buoyed by higher electricity demand growth (we assume 3% annually over the next 10 years), driven largely by new power-intensive data centres,” it added.
Kenanga Research said it expected higher demand growth assumption during Regulatory Period 4 (RP4: 2025-2027), as compared with 1.7% during RP3 (2022-2024), in view of strong electricity demand growth in 2022 (6%) and 2023 (3.6%), and an estimated growth of 2.5% to 3% this year as guided by TNB.
Meanwhile, it expected Petronas Gas Bhd (PetGas) to be buoyed by the upward revision in the imbalance cost pass-through surcharge recently.
Gas Malaysia Bhd , on the other hand, was poised for a higher sales volume, partly driven by improved demand from glove producers, but the company would likely have to come to terms with lower margins as gas prices ease, Kenanga Research said.
It rated PetGas and Gas Malaysia as “market perform”, with target prices of RM17.87 and RM3.55, respectively.
For 1Q24, Kenanga Research said Gas Malaysia’s core profit topped its forecast due to higher-than-expected sales volume and a better average selling price.
As for TNB, despite the seasonally weakest quarter in a year, its electricity sales was a record, driven by both the commercial and industrial segments. This was underpinned largely by the additional demand for electricity from two new data centres.
Malakoff, on the other hand, returned to the black with a net profit of RM62.2mil in 1Q24 against a net loss of RM75.7mil in 1Q23, while PetGas’ 1Q24 earnings grew 11% year-on-year, thanks to lower gas cost.