Why is the Malaysian market going to experience continued growth in 2013?

Finalisation of a new gas price and electricity tariff will be key inflexion points in the coming year, it was recently stated. Tenaga Nasional Bhd will be the biggest beneficiary of sector reform but near term upside may be limited by a delayed tariff hike and higher capital expenditure (capex).

Petronas Gas Bhd is preferred as it is most leveraged to Petronas’ increasing gas capex due to Gas Malaysia’s resilient dividend play.

There is a more challenging outlook for YTL Power International Bhd, as speculators believe that privatisation is a wild card.

It is expected that power demand in Malaysia is to grow by 4.5% this year, driven mainly by the cement and steel industries following the implementation of Economic Transformation Programme projects. The rising demand will gradually reduce the reserve margin to 18% in the year 2018, so the country is building 4,500MW of new capacity. The Energy Commission (EC) has called for tenders for two new coal-fired plants.

The competitive bidding and ongoing sector reform could result in a sector consolidation and benefit players with strong balance sheets over the longer term.

The Melaka regasification plant is targeted for completion in second quarter of this year. The higher cost of liquefied natural gas (LNG) is likely to lead to a hike in electricity tariff, but that may not happen until after the General Election.

TNB will benefit the most from the sector reform but it is preferred that Petgas in the near-term as it is the most leveraged to larger gas supply with potential award of a third regasification plant in Pengerang, Johor this year. Gas Malaysia is a resilient yield play that will also benefit from LNG developments which will increase gas supply by 10% this year.

Malakoff Corporation Bhd and 1Malaysia Development Bhd, the largest IPPs in Malaysia, are planning for listing this year. It is expected these initial public offerings (IPOs) to be well received given their large market capitalisation, resilient earnings and sustainable dividend yields. They could trigger a sector re-rating on expectations the ongoing reform efforts would make power price setting more transparent and lift returns of more efficient independent power producers (IPPs)

Additionally, replacement cost had risen by c.30% over the last five years.