The Utilities sector delivered a remarkable performance in the second quarter of 2024, with three companies exceeding analysts' expectations and two meeting them. $TENAGA (5347.MY)$ stood out with record electricity sales, while $GASMSIA (5209.MY)$ benefited from improved retail margins. $MALAKOF (5264.MY)$ also surpassed forecasts due to strong power generation earnings.

$KENANGA (6483.MY)$ Stock Broking House have upgraded the sector to OVERWEIGHT, with TENAGA upgraded to OUTPERFORM and identified as the sector's top pick. $YTLPOWR (6742.MY)$ remains another OUTPERFORM pick, with analysts focusing on its AI data centre project.

The second quarter of 2024 saw significant improvements in the sector, with TENAGA's core profit boosted by increased plant efficiency and higher electricity demand, particularly from commercial and domestic segments. GASMSIA outperformed again, driven by better margins despite flat sales volumes, while MALAKOF benefited from higher local power generation earnings. YTLPOWR, while seeing lower margins in PowerSeraya, recorded positive results from Wessex Water and its telco unit. $PETGAS (6033.MY)$ met expectations, continuing to enjoy better margins due to lower gas costs.

TENAGA is expected to lead the sector's growth, with demand forecasted to rise by 3.5% annually from 2024 to 2035, in line with its new guidance. This growth is driven by the expansion of data centres, which is expected to improve plant efficiency and boost earnings. Additionally, higher capital expenditure on transmission and distribution is anticipated, further supporting earnings growth. The volatility in coal prices has stabilised, reducing the likelihood of fuel margin shocks for both TENAGA and MALAKOF.

YTLPOWR's AI data centre, set to be completed in the first quarter of 2025, remains a key focus, while its telco unit has turned around due to profits from the Sabah Point of Presence project. Wessex Water's turnaround, driven by higher tariffs, is expected to continue into 2025. PETGAS has seen a boost from the recent Imbalance Cost Pass-Through surcharge revision, while GASMSIA is poised for higher sales volumes, although margins may be affected as gas prices ease.

The sector's upgrade to OVERWEIGHT reflects the strong performance of TENAGA, which is set to benefit from foreign direct investment in data centres. The sector remains appealing due to its earnings resilience, supported by regulated assets that provide steady cash flow and dividend yields of up to 6%.

Source: Kenanga
Title: An Upbeat Quarter