KUALA LUMPUR: The utilities sector is expected to sustain earnings into the second half of 2024 (2H24), as incentive-based regulation (IBR) and imbalance cost pass-through (ICPT) frameworks remain intact and demand for utility products continues to increase in tandem with the ongoing economic revival.
Hong Leong Investment Bank Bhd (HLIB Research) stated the ICPT framework remains intact, with its latest sum being approved for 2H24.
Tenaga Nasional Bhd (TNB) is expected to recoup through government subsidies of RM2.2 billion and tariff surcharges to end users.
"Similarly, the IBR framework for Petronas Gas Bhd (PetGas) remains effective with higher adjusted rates for gas transportation and RGTSU regasification and lower rates for RGTP regasification effective 2024.
"These frameworks protect utility companies from the fluctuation in demand as well as input costs such as fuel prices, forex, and inflation," it said in a note.
It said global commodity fuel costs have been stabilising since 2H23.
TNB's transmission and distribution segment is protected under the ICPT mechanism, where fuel costs are passed through every six months.
However, the power purchase agreement service level agreement will be affected by the short-term fluctuation of energy fuel cost variations due to the differential of coal inventory costs vs. the applicable coal fuel price.
"Nevertheless, earnings have normalised again as the fuel price stabilises. Still, fuel energy costs are relatively high compared to the benchmark, resulting in an ICPT shortfall and continued support from the government (in terms of subsidies) and tariff surcharge implementation," it said.
As for YTL Power International Bhd, it was noted that the that the majority of the group's earnings are not affected by higher commodity fuel costs.
With gas prices stabilising and electricity prices for commercial and industrial segments being allowed for surcharges by the government, the PetGas utility segment margin will continue to sustain itself.
However, the incurred internal gas consumption costs are generally passed on to clients periodically.
The added emergence of data centres will also benefit utility companies.
Given the stronger demand for electricity, TNB will have a stronger avenue to enlarge its capex spending for energy transition projects as part of the national net zero emissions policy.
YTL Power's YTL Communications Sdn Bhd will deploy NVIDIA's H100 chipsets for the first stage and potentially NVIDIA's latest GB200 chipsets in subsequent stages.
YTL Power's newly acquired 53.2 per cent Ranhill Utilities Bhd will also benefit from the emergence of data centres in the state, as it is also a water-intensive industry.
The firm maintained an "overweight" call on the utilities sector. Its top picks are YTL Power (TP: RM7.45). It maintained 'Hold' on TBB (TP: RM13.30) and PetGas (TP: RM18).