KUALA LUMPUR (June 12): Kenanga Research has kept its neutral call on the utilities sector given its earnings defensiveness, modest growth prospects and decent dividend yields of between 3% and 6%, with its top pick being Tenaga Nasional Bhd (KL:TENAGA).

“The sector’s earnings delivery (against our forecasts) during the recently concluded 1QFY24 reporting season improved sequentially, with all the stocks under our coverage either meeting or beating our expectations,” it added.

The research firm said the stabilising coal prices reduced earnings volatility of Tenaga (outperform; target price [TP]: RM14.50) and Malakoff Bhd (KL:MALAKOF) (market perform; TP: RM0.68) while Gas Malaysia Bhd (KL:GASMSIA) (market perform; TP: RM3.55) benefited from a pick-up in sales volume.

Additionally, lower gas prices were a boon to Petronas Gas Bhd (KL:PETGAS) (market perform; TP: RM17.87).

“Our sector's top pick is Tenaga given the rising electricity demand from data centres, “ it added.

Tenaga’s 1QFY24 core profit eased 11% year-on-year (y-o-y) as higher taxation more than offset a significantly lower negative fuel margin.

However, despite being seasonally the weakest quarter in a year, its electricity sales (+1.3% q-o-q; +9.6% y-o-y) in 1QFY24 was a record, driven by commercial (+11.2% y-o-y) and industrial segments (+3%), underpinned largely by the additional demand for electricity from two new data centres.

Meanwhile, Malakoff returned to the black with a net profit of RM62.2 million in 1QFY24 versus a net loss of RM75.7 million in 1QFY23, during which its coal-fired power plants, Tanjung Bin Power and Tanjung Bin Energy, were hit by significant negative fuel margin.

Petgas’ 1QFY24 earnings grew 11% y-o-y thanks to lower gas cost.

“Earnings of Tenaga and Malakof remain resilient backed by their regulated assets, with reduced volatility on stabilising coal prices.

“Tenaga will be buoyed by higher electricity demand growth (we assume 3% annually over the next ten years), driven largely by new power-intensive data centres,” it added.

Meanwhile, in view of strong electricity demand growth in FY22 (+6%) and FY23(+3.6%), and 2.5% to 3% in FY24 guided by Tenaga, Kenanga expect higher demand growth assumption during Regulatory Period 4 (2025-2027) as against 1.7% during Regulatory Period 3 (2022-2024).

“On the other hand, Petgas is buoyed by the upward revision in the Imbalance Cost Pass-Through (ICPT) surcharge recently, while Gas Malaysia is poised for a higher sales volume (partly driven by higher demand from glove producers) but will have to come to terms with lower margins as gas prices ease,” it said.

At noon break, Tenaga shares settled 20 sen or 1.5% higher at RM14, valuing the company at RM81 billion, while Malakoff shed 3.5 sen or 4.1% to 81.5 sen, translating into a market capitalisation of RM4.1 billion.

Petgas lost 16 sen or 0.9% to settle at RM18.12, to achieve market value of RM35.9 billion while Gas Malaysia gained 2 sen or 0.6% at RM3.66, valuing the group at RM4.7 billion.