Utility sector’s recovery to continue in 2022

Analyst maintains its ‘Overweight’ call on the utility sector, given that the market uncertainty is plagued by the Covid-19 pandemic 


HONG Leong Investment Bank Bhd (HLIB Research) expects demand for utilities (ie electricity and gas) to continue its recovery trend into 2022, in tandem with economic reopening under Phase 4 of the National Recovery Plan (NRP). 

Its analyst Daniel Wong has maintained ‘Overweight’ call on the utility sector, given the earnings and dividend sustainability of the sector in a time of market uncertainty plagued by the Covid19 pandemic. 

“Malaysia is progressing well intoPhase4ofNRP,asthenational vaccination rate has hit an advanced stage while the number of new Covid-19 cases remains under control. 

“Demand for utilities, ie electricity and gas, are expected to continue its recovery trend into 2022 in tandem with the economic reopening. 

“Furthermore, national borders are expected to be relaxed in 2022, with a vaccinated travel lane with a number of countries,” he wrote in a research note last week. 

Wong noted that global energy prices had recently retraced after reaching a high in October, which reaffirmed his views of a relatively short-term surge and normalisation in 2022 post the winter season. 

He noted that Tenaga Nasional Bhd (TNB) is expected to remain neutral, as under the regulated asset base-imbalance cost passthrough mechanism, the higher energy cost will be recouped via a combination of government subsidies and surcharges to end users. 

Wong stated that YTL Power International Bhd (YTLP) and Petronas Gas Bhd (PetGas) are not directly affected by the fuel energy prices. He wrote that utility companies are committed to improve their green energy portfolio, in line with the nation’s policy to achieve carbon neutrality by 2050.

The government is committed to reduce carbon emissions intensity by 45% by 2030 and achieve nationwide carbon neutrality by 2050 by accelerating renewable energy (RE) programmes and reducing reliance on coal-fired power plants over time. 

Wong said the higher RE mix will reduce the overall impact of global energy fuel price volatility on Malaysia’s electricity tariff rates. 

The higher RE mix policy will also pose earnings sustainability risk to large power generation players as they will face an increasingly competitive market for the replacement of their expiring power plant portfolio (especially coal). 

TNB has already committed towards carbon neutrality by 2050 in line with the government’s policy, while YTLP has started planning for its first large-scale solar (LSS) 500MW in Malaysia (Paka 585 MW PPA expired in June 2021). 

PetGas is exploring opportunities for new cogeneration plants, while at the same time benefitting from increasing demand for liquefied natural gas as a cleaner source of energy in Malaysia. 

HLIB has maintained a ‘Buy’ call on TNB with a target price (TP) of RM13.60; YTLP (TP: RM0.85); and PetGas (TP: RM19) on the grounds of these companies’ stable earnings potential will enable them to sustain dividend payouts.