Utilities sector
Maintain overweight: The utilities sector saw fairly subdued share price performance in the first half of 2019 (1H19) with only Malakoff Corp Bhd as the best performer. The big capitalised utilities companies — Tenaga Nasional Bhd (TNB) and Petronas Gas Bhd (PetGas) — performed dismally. PetGas, which largely reflects weaker earnings expected in 2019, saw heavy selldown in early trades ahead of its results release. It has yet to recover despite matching 1H18 dividend per share. Meanwhile, TNB’s share price trailed the consumer index for most of 1H19 on concerns over potential reforms post-Malaysia Energy Supply Industry (Mesi) 2.0 before recovering at the end of May, post-first quarter financial year 2019 results.

Relative to our estimates, the sector’s second quarter 2019 (2Q19)/1H19 fared well though we can sum up the performance as pedestrian. TNB, PetGas and Gas Malaysia Bhd (GasM) 1H19 earnings were within estimates, but Malakoff’s were slightly ahead due to sustained uptime at Tanjung Bin Energy power plant/Thymosin beta-4 and lower-than-expected minority interest charge-off. PetGas’ earnings were noteworthy vis-à-vis the share price rout (market expectations) ahead of its results — the gas processing (GP) unit saw structural margin expansion while utilities also did well, mitigating its earnings weakness.

We generally expect weaker earnings for the sector in 2H19 stemming from TNB (as more Malaysian Financial Reporting Standards 16 adjustments dialled in) and, possibly, Malakoff (lower dispatch by the gas-fired plants). GasM should see some reprieve in margins following the under- recovery in 1H19 portends to higher tariff in the latter half of 2019. PetGas should see 1H19 momentum sustained with possible upside from the GP and utilities segments.

We are “overweight” on the sector as we believe the 1H19 share price weakness has more than priced in earnings risks. Changes from Mesi 2.0 would likely not be too disruptive to TNB’s existing business model while ongoing reorganisation portends to possible value unlocking of GenCo. PetGas could offer better-than-expected earnings stability, making the stock a compelling defensive play ahead of uncertainties. — BIMB Securities Research, Sept 4