Structural growth reshapes investment case for utility stocks

This article first appeared in Capital, The Edge Malaysia Weekly on July 20, 2026 – July 26, 2026

LONG regarded as a defensive sector offering stable earnings and dividends, utility stocks are increasingly being viewed through a different lens. The rapid expansion of data centres (DCs) is creating a structural growth story that is reshaping investor perception of the sector.

Fund managers say the emergence of long-term growth drivers has added another layer of appeal to utility stocks, beyond their traditionally attractive dividend yields. Among the major stocks in this segment, Gas Malaysia has the highest 12-month trailing dividend yield of 4.6%, followed by PETRONAS Gas Bhd (KL:PETGAS) with 4%, Tenaga Nasional Bhd (KL:TENAGA) with 3.7%, Mega First Corp Bhd (KL:MFCB) with 3.4% and Malakoff Corp Bhd ­(KL:MALAKOF) with 2.9%.

The proliferation of artificial intelligence (AI) and DCs is driving unprecedented demand for power infrastructure. As digital transformation and industrial activity accelerate, reliable power, advanced cooling, intelligent automation and connected systems are required in order to perform at scale.

Fortress Capital founder and CEO Datuk Thomas Yong says the current utility cycle differs from previous ones because the sector now combines traditional defensive characteristics with a structural growth catalyst.

“Compared with other defensive sectors, the defining feature of this utility cycle is that the defensive floor — regulated earnings, predictable cash flows and decent yields — is now paired with a genuine structural growth catalyst, which is historically unusual for the sector,” Yong tells The Edge.

“Consumer staples remain tied to domestic consumption and population growth. Healthcare carries near-term regulatory overhang around medical inflation and reimbursement issues. Telecommunications is a mature sector with limited upside and has underperformed. REITs (real estate investment trusts) offer yields but are rate-sensitive with no equivalent catalyst.

“Utilities combine the regulated floor with DC and energy-transition tailwinds.”

As such, Yong believes the sector’s risk-reward profile is differentiated, provided investors focus on companies with direct exposure to the structural demand drivers rather than those whose earnings rely primarily on legacy fuel pass-through mechanisms.

“That said, we would not treat utilities as a blanket ‘defensive-with-growth’ allocation. The benefits are concentrated, valuations now embed a growth premium that requires execution and near-term fuel price volatility introduces a risk dimension atypical of traditional defensive sectors,” he says.

“The defensive label still fits the regulated earnings base, but these are increasingly capital-intensive growth businesses.”

Tradeview Capital Sdn Bhd CEO Ng Zhu Hann says utility stocks have long been a core holding in the firm’s portfolio, although he is not rushing to grow exposure at current valuations.

“We will increase our holdings only if share prices retreat to more reasonable levels. We are not chasing the sector at current prices unless the stocks come down significantly.”

Among utility stocks, industry stalwart Tenaga remains a top pick among analysts.

Kenanga Research, in a July 8 note, said the utility giant stands to benefit from electricity demand growth, a transmission and distribution capex up cycle, power purchase agreement extensions and upcoming capacity expansion.

Tenaga has raised its demand growth guidance to 4.5% to 5.5%, from 4% to 5% previously, fuelled by the accelerating data centre momentum.

Kenanga also favours independent power producers such as Malakoff and YTL Power International Bhd (KL:YTLPOWR).

RHB Research believes a potential listing of YTL Power’s DC business next year could value the segment at RM28 billion, or RM3.06 per share, prompting it to raise its target price for the stock to RM6.

The research house expects YTL Power’s DC capacity to reach 578mw by June 2028, compared with its previous forecast of 420mw, reflecting its faster-than-expected DC expansion to meet robust demand. YTL Power is targeting up to 1.2gw of capacity at its DC park in Kulai, Johor, double the initial planned capacity.

Areca Capital Sdn Bhd CEO Danny Wong says the combination of defensive earnings and structural growth makes utility stocks particularly attractive to long-term investors.

“Conventionally, utility stocks have been viewed purely as defensive dividend plays. But, today, they also have meaningful growth drivers, unlike many other sectors where earnings are boosted only by one-off contracts or temporary catalysts,” says Wong.

He dismisses concerns over volatility in AI-related stocks globally, arguing that demand for DCs is genuine and sustainable.

While Malaysia is not a major AI developer, Wong says the country is well positioned within the regional DC supply chain, allowing utility companies to benefit from rising power demand.

“The AI-driven DC boom will provide a significant jump in revenue for utility companies. Short-term earnings may fluctuate but long-term prospects are positive.”

Yong says Fortress has selectively raised exposure in utility stocks over the past 12 to 18 months, taking a targeted rather than broad-based approach.

Its investment thesis is underpinned by a genuine inflection in electricity demand, with DC load utilisation doubling year on year to about 1.05gw in 1Q2026.

“Tenaga has secured about 8.3gw of energy supply agreements, with a further 10gw under negotiation. Overall system demand grew 7% in 1Q2026,” he says, noting that the sector is experiencing its strongest growth in years, supported by firm commitments from hyperscale operators.

Another major catalyst is the regulated capital expenditure (capex) up cycle.

Under the Regulatory Period 2025-2027 (RP4), Tenaga has allocated RM42.82 billion in capex, more than double the RM20.55 billion allocated under RP3 (2022-2024). Yong says this will drive sustained growth in its regulated asset base (RAB) and earnings.

At the same time, he says the retirement of about 6.4gw of ageing coal-fired generation capacity, together with the National Energy Transition Roadmap (NETR), is creating durable demand for new gas-fired generation, renewable energy and battery storage.

Although well-capitalised players with strong execution capabilities are best positioned to benefit, Yong stresses that stock selection remains critical.

“We favour companies with direct and growing exposure to the DC load cycle, strong visibility of regulated earnings and sufficient balance sheet capacity to fund the capex ramp.

“We remain more cautious on companies whose earnings are primarily tied to commodity pass-through volatility without the offsetting benefit of meaningful RAB growth.”

On valuations, Yong notes that Tenaga has rerated from an 11 to 13 times historical price-to-earnings ratio to about 17 times currently, with much of the expansion reflecting structural earnings growth rather than merely positive market sentiment.

While consensus earnings forecasts for Tenaga are flat, he says this reflects the mechanical lag of an aggressive capex ramp rather than weak underlying demand.

“Higher depreciation and finance costs associated with the RP4 programme hit the P&L (profit and loss) statements first, while the enlarged RAB’s contribution is recognised later. Current valuations, therefore, reflect the multi-year earnings trajectory from 2027 and not 2026. In that sense, the rerating has a fundamental basis.”

Nonetheless, he cautions that the margin of safety has narrowed.

“Investors are paying for growth that must be delivered on schedule, and there are two caveats that could temper the RAB story. Roughly RM16 billion of the RM42.82 billion [RP4 capex] is contingent capex, with the recovery mechanism still being finalised.

“The heavy investment will also pressure gearing, free cash flow and dividend cover during the rollout phase. Any slippage in capex pace or RAB conversion could make the valuations appear stretched in the near term,” he says.

Yong identifies fuel cost recovery, capex execution, market liberalisation as well as regulatory intervention as the sector’s key risks.

Under RP4, the monthly Automatic Fuel Adjustment (AFA) mechanism is capped at three sen/kWh. While this is neutral for Tenaga within the cap, any sustained increase in fuel costs beyond that level would either have to be absorbed by the utility or require cabinet approval for tariff adjustments.

The AFA mechanism, introduced by the Energy Commission in July 2025, provides monthly adjustments to electricity tariffs based on preceding fuel costs such as gas and coal used in power plants as well as exchange rates. It replaces the Imbalance Cost Pass-Through (ICPT), which was adjusted every six months.

Yong notes that delivering RM42.82 billion of RP4 capex is unprecedented.

“Any delays arising from equipment shortage, labour constraints or regulatory approvals could create a gap between market expectations and actual earnings. Water supply constraints in Johor have already delayed some DC developments.”

He also points to market liberalisation as an oft-overlooked structural risk. Third-Party Access (TPA) and the Corporate Renewable Energy Supply Scheme (CRESS) allow large electricity consumers, including hyperscalers, to procure renewable electricity directly, potentially reducing Tenaga’s long-term market dominance.

On the regulatory risks, Yong says the higher base tariff of 45.62 sen per kWh has already drawn public and political scrutiny.

“If rising energy costs become a populist issue ahead of the next general election, there could be pressure on the government to intervene in ways that compromise the cost-recovery principles of the Incentive-Based Regulation (IBR) framework.”

The base electricity tariff for Peninsular Malaysia increased by 14.2% to 45.62 sen per kWh at the start of RP4, from 39.95 sen under RP3.

Tradeview’s Ng agrees that execution remains the key challenge.

“As utilities roll out their capex programme, profitability should improve. The key question is whether they can upgrade transmission infrastructure, cables and related equipment quickly enough to meet the surge in demand.”

In the water segment, he observes that progress in replacing ageing pipelines has been slow, contributing to persistently high non-revenue water losses.

His preferred stocks are Tenaga, Mega First, Ranhill Utilities Bhd (KL:RANHILL) and PBA Holdings Bhd (KL:PBA).

Besides Tenaga, Maybank Investment Bank Research also has a “buy” call on Mega First, as strong free cash-flow generation from its Don Sahong hydropower project in Laos over the longer term will provide ample balance sheet headway for its new projects.

Currency movements will remain an important factor to monitor in relation to the sector. In general, a stronger ringgit benefits Tenaga, as it will spend less on fuel input costs.

Hong Leong Investment Bank Research (HLIB Research) notes, however, that a stronger local currency would weigh on YTL Power because of lower foreign earnings translation. The research house expects the ringgit to strengthen to 4.05 against the US dollar by year-end, despite recent weakness. As at noon last Thursday, the ringgit was trading at 4.0725 against the greenback.

HLIB Research also cautions that higher domestic gas costs are expected to take effect from this month, as the impact of the Middle East conflict on Malaysia’s gas prices is reflected with a lag of about four months under Petroliam Nasional Bhd’s (PETRONAS) pricing mechanism.

Meanwhile, coal prices remained elevated because of Indonesia’s export restrictions and stronger seasonal demand from Northeast Asia, before easing towards end-June amid concerns over slowing global growth.

Newcastle coal prices averaged US$128 per tonne in June, while PETRONAS’ regulated gas price increased to RM35.95 per MMBtu (million British thermal units) in April. 

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