KUALA LUMPUR (Oct 16): Tenaga Nasional Bhd (TNB), Malakoff Corp Bhd and YTL Power International Bhd are CGS-CIMB Research's top picks for the energy sector, following the wider emphasis the government placed on renewable energy (RE)-related measures and plans in Budget 2024.

In addition to the RM2 billion seed fund by the government, the RM200 billion funding allocation by financial institutions for green projects is “encouraging, given the massive investments planned under the National Energy Transition Roadmap (NETR)".

It said total spending of RM210 billion to RM240 billion will be required over 2023-2029, and RM460 billion to RM480 billion over 2030-2039, to meet the country’s NETR objectives, according to the government’s projections.

“Thus, this funding provision should somewhat ease concerns about financing availability for such ambitious investment plans, in our view,” it said.

CGS-CIMB also believes that the emphasis on the Corporate Green Power Programme and third-party access signals progress towards establishing a mechanism for electricity exports.

“We see the measures promoting solar adoption and tax incentives, including for carbon credit trading, as necessary steps towards the energy transition. The extension of tenures and higher statutory income set-off for the Green Investment Tax Allowance are other positives that should, in our view, help spur RE investments,” it added.

Notably, the government aims to adjust electricity subsidies for fairer distribution next year.

In 2022, 50% of the country’s electricity subsidy bill was enjoyed by 10% of consumers with the highest electricity consumption, while only 10% of the subsidies flowed through to 50% of consumers with the lowest electricity consumption.

That said, the government began efforts to right-size this imbalance this year by imposing a surcharge of 20sen/kWh on medium- to high- voltage industrial and commercial users in the first half of this year.

For the second half of 2023, the government announced a surcharge of 10sen/kWh for high-volume residential consumers (using more than 1,500kWh per month), representing 1% of users, while tariffs for the balance 99% were left unchanged.

“Based on Budget 2024, it is apparent that the government intends to roll back the subsidies further, particularly for these user brackets. The tariff revisions should translate into lower receivables, and relieve pressure on TNB’s cash flow from demanding working capital requirements, in our view,” it added.

CGS-CIMB has an "add" call on Malakoff, with a target price (TP) of 80 sen, as it sees negative fuel margins affecting its profits as transient in nature.

“At current levels, the market is, in our view, overlooking strong FCFs (free cash flows) and room for a recovery in dividends going into 2024, as well as potential for expansion in the RE space,” it said.

The research house has a "hold" recommendation on Petronas Gas Bhd (PetGas) (TP: RM17), which is expected to see upside from its potential participation in the NETR’s carbon capture, usage and storage plans, and an "add" on TNB (TP: RM12), which is expected to benefit the most from the NETR.

CGS-CIMB has an "add" recommendation on YTL Power (TP: RM2.40) for its unique green energy data centre in Johor and new prospects in bioenergy.

Malakoff shares closed down 1.5 sen or 2.46% at 60 sen apiece, translating into a market capitalisation of RM2.98 billion. PetGas was unchanged at RM17.20 (with a market cap of RM34.03 billion), TNB was down seven sen or 0.7% at RM9.95 (market cap: RM57.58 billion), and YTL Power shed three sen or 1.48% to close at RM2 (market cap: RM16.32 billion).

Go here for our comprehensive Budget 2024 coverage.