Investment Highlights

• We upgrade YTL Power (YTLP) to BUY from HOLD with a higher SOP-based fair value of RM1.00/share vs. RM0.75/share previously. We raise YTLP’s FY23F net profit by 2.4x to account for higher earnings from YTLP Seraya, the Singapore utility unit. We ascribe a 3-star ESG rating to YTLP.

• YTLP’s annualised 1HFY23 net profit exceeded our forecast by more than 2-fold and consensus by 80%. YTLP out-performed expectations due to YTLP Seraya’s sterling performance in Singapore. This compensated for poor results in the water/sewage and telecommunications divisions.

• Apart from YTLP Seraya, YTLP’s 1HFY23 net profit was boosted by the absence of contribution to a corporate social programme and fair value losses on investments.

• Pre-tax profit of YTLP’s Singaporean division surged to RM591mil in 1HFY23 from RM90mil in 1HFY22, underpinned by higher margins and tariffs. Competition in the Singaporean utility market has eased as vesting contracts of some of the power companies expired last year. Pre-tax margin of the Singaporean unit rose to 8.6% in 1HFY23 from 1.5% in 1HFY22.

• Incidentally, the earnings of YTLP Seraya included the consolidation of Tuaspring, which owns a 396MW combined cycle gas power plant in Singapore. The RM862.3mil acquisition of Tuaspring was completed on 1 June 2022.

• On a negative note, pre-tax profit of the water and sewerage division (Wessex Water in UK) plunged by 96.6% YoY to RM9mil in 1HFY23. Wessex Water was affected by increases in interest expense and costs of energy and chemicals in 1HFY23. Pre-tax margin of the division fell to 0.4% in 1HFY23 from 13.3% in 1HFY22.

• The mobile broadband unit (mainly YES network) recorded a larger pre-tax loss of RM156mil in 1HFY23 vs. RM50.6mil in 1HFY22. We attribute the wider losses to higher customer acquisition costs.

• YTLP is currently trading at a bargain FY23F PE of 9x, which is lower than its 2-year average of 24x, and offers compelling dividend yields of 7%.

Source: AmInvest Research - 24 Feb 2023