KUALA LUMPUR (June 30): RHB Research upgraded its ratings of Tenaga Nasional Bhd (TNB) to "buy"  from "neutral", and the local power sector to "overweight" from "neutral", due to limited regulatory risk following the government's recent electricity tariff adjustments and decision to maintain the Imbalance Cost Pass-Through (ICPT) mechanism, and its consistent payments to the national utility company.

In a research note on Friday (June 30), RHB said TNB, now with a target price (TP) of RM10.40, had received RM9.13 billion out of a total of RM10.4 billion in ICPT cost recovery in the first half of 2023 (1H2023) from the government, which is further committed to subsidising RM5.2 billion in 2H2023 (with RM4.7 billion of this remitted to the company). The research house expects the remainder to be collected from the surcharges imposed, and ICPT receivables to decrease, relieving the working capital pressure on TNB amid moderating coal prices for power generation.

The stock is trading at 10.4 times estimated price-earnings for the financial year ending Dec 31, 2024, which is below its five-year mean of 11.8 times.

For the power sector, however, RHB's top pick is YTL Power International Bhd, with a "buy" call and a TP of RM1.55, thanks to its strong earnings delivery backed by its PowerSeraya unit in Singapore, and further upside from a 45%-owned oil shale power plant in Jordan, which is likely to start contributing to group numbers from the financial year ending June 30, 2024.

YTL Power's venture into the digital banking and green data centre businesses are also long-term positives, despite their minimal impact on near-term earnings, said the research house.

RHB's favourites also include Solarvest Holdings Bhd, with a "buy" recommendation and a TP of RM1.28, due to its position as a market leader, capitalising on Malaysia’s ambition to achieve a 31% renewable energy (RE) capacity mix target.

The company’s 2.5GW tender book reflects growing demand for solar energy, which should bring about replenishment opportunities while it scales up its presence across the region, said the research house, adding that the upcoming Corporate Green Power Programme also provides opportunities for Solarvest to grow its asset portfolio, in line with its business strategy to expand recurring income.

RHB further highlighted policy shifts by the government, namely the recent electricity tariff hikes and lifting of the RE export ban, in its journey to increase RE adoption.

Against this backdrop, the research house is upbeat on Solarvest’s earnings growth trajectory going into the financial year ending March 31, 2024. 

For the power sector as a whole, downside risks include unfavourable effects of regulatory changes, higher operating costs and unscheduled plant outages.

At the time of writing, TNB shares had risen half a sen or 0.55% to RM9.06, with a market capitalisation of RM52.43 billion. YTL Power was unchanged at RM1.28 a share, giving it a market value of RM10.44 billion. Solarvest too was flat at RM1.16, with a market cap of RM774.36 million.

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