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“These assets generate recurring cash flows, anchoring dividend yields of 4%-6%,” Kenanga Research wrote in its report yesterday.

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The brokerage named national power utility company Tenaga Nasional Bhd (TNB) as its top sector pick.

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This is premised on TNB being a good proxy to Malaysia’s economic recovery, its earnings resilience safeguarded by the imbalance cost pass-through (ICPT) mechanism, and it being a must-own stock in the portfolios of Malaysian stocks, given its heavy weighting in key indices and syariah status.

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“The earnings of TNB will be backed by a fixed rate of return of 7.3% on its regulated assets with an embedded 1.7% annual demand growth during the regulatory period three (RP3) under the incentive-based regulation or IBR framework,” Kenanga Research said.

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“We project a demand growth of 1.8% in 2023, which is slightly higher than the guided growth of 1.7% under the RP3 parameter. The demand growth will be driven largely by the recovery in the industrial sector in Peninsular Malaysia,” it added.

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On gas utilities, Kenanga Research said it expected Petronas Gas Bhd (PetGas) and Gas Malaysia Bhd to be entitled to a rate of return on the regulated asset base (RAB) in the upcoming RP2, spanning from 2023 to 2025, that is similar to that under RP1.

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“In RP1, the rate of return on PetGas’ RAB was below 8%, while that of Gas Malaysia was 7.3% to 7.5%.

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“Even at a lower rate of return, we still expect neutral or higher absolute earnings given the growing RAB base,” it said.

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Kenanga Research, however, noted the high cost of input, that is gas, would hit PetGas’ non-regulated business, namely, the utilities division (as it uses gas as fuel to generate and supply power, steam and gases to industries) but Gas Malaysia would benefit from its retail margins which are calculated based on a fixed percentage on the gas cost.

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Nevertheless, the brokerage expected gas prices to normalise from the second half of 2023.

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Meanwhile, it expected IPPs to post improved earnings next year.

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“With the improved operating environment in Singapore, YTL Power International Bhd should expect sustained profitability at PowerSeraya coupled with new contributions from Tuaspring.

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“Malakoff Corp Bhd should also see improved earnings stability, following the completion of repair works in mid-February 2022 at its 1,000MW coal-fired power plant under Tanjung Bin Energy,” Kenanga Research said.

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“On the other hand, earnings growth at Samaiden Group Bhd will be anchored by sustained renewal energy initiatives by the government,” it added.