YTLPOWR: Utilities Sector Poised for Strong Growth, Key Stocks Rated Buy

The utilities sector is anticipated to sustain robust performance into 2026, buoyed by stable regulatory frameworks and a significant surge in demand. This positive outlook is supported by robust data centre developments, an ongoing push for renewable energy, and strategic capital expenditure by key players. Despite moderating commodity fuel prices, their impact remains largely neutral due to effective fuel cost pass-through mechanisms.

A major catalyst for the sector’s growth is the booming data centre industry. Malaysia is rapidly emerging as a leading data centre hub in ASEAN, with significant infrastructure works completed by Tenaga Nasional Berhad (Tenaga) to support substantial new projects. This expansion, coupled with broader economic growth, is expected to drive a considerable increase in electricity and water demand.

Sector Performance and Drivers

Tenaga’s transmission and distribution segment is well-positioned for stronger earnings from FY26 onwards. This is attributed to the approved RM42.8 billion capital expenditure under Regulatory Period 4 (RP4), which includes substantial allocations for base and contingent capex. The finalisation of the allowable return mechanism for contingent capex and the resolution of long-standing tax issues related to investment tax allowances are expected to further boost profitability by lowering future effective tax rates. Looking ahead, a projected RM50 billion capex cycle under RP5 (2028-2030) aims to expand the ASEAN transmission grid and support national net-zero emissions targets, potentially doubling Tenaga’s regulated asset base by 2030.

YTL Power International Berhad (YTLP) is also projected to deliver sustainable earnings, underpinned by strong contributions from its diverse portfolio. Key drivers include Wessex Water in the UK, which has secured provisional approval for higher tariff adjustments, and the newly consolidated Ranhill Group benefiting from increased tariffs. Furthermore, the gradual commencement of large-scale solar projects under the LSS PETRA 5+ scheme and the continued deployment of data centre projects are expected to enhance YTLP’s earnings profile, offering resilience against currency fluctuations that might impact foreign translated earnings.

Petronas Gas Berhad (PGB) is set to maintain largely sustainable earnings through FY26-28. This stability is supported by the new Regulated Asset Base (RAB) structure for its Gas Transportation and Regasification segments and the continuation of its Gas Processing Agreement (GPA) contract. The pass-through mechanism for internal gas consumption costs further protects its profitability, although its Utilities segment might experience some slowdown in earnings due to anticipated high maintenance expenses in the upcoming quarter.

Investment Outlook

HongLeong Investment Bank maintains an OVERWEIGHT call on the Utilities sector, citing the sustainable earnings and dividend prospects. Among the key players, Tenaga remains a top pick, with its earnings base well-protected by pass-through mechanisms and government compensation, alongside a resolved tax dispute that allows for future taxable income offsets. YTLP is also a top pick, with its valuations considered undemanding relative to peers and the broader market, supported by resilient diversified earnings streams.

The firm reiterates a BUY recommendation for Tenaga with an unchanged DCFE-derived target price of RM17.25. Similarly, YTLP maintains a BUY rating with an unchanged target price of RM5.08, based on a 10% discount to its Sum-of-Parts valuation. For PGB, a HOLD recommendation is maintained with an unchanged target price of RM17.86, acknowledging its decent dividend yield.