• We see an imminent turnaround at Wessex Water, which should partially mitigate the impact of a potential drop in contribution from Power Seraya.

• YTLP is currently exploring growth projects that could add incrementally to earnings over the next 3-5 years, largely within the renewables space.

• We reiterate our Add rating with a higher SOP-based TP of RM3.00.

Potential Turnaround at Wessex Water

So far this year, investor interest in YTLP has largely been driven by the strong earnings delivery at Power Seraya but we now see emerging growth potential from Wessex Water. The latter’s earnings have plunged, with quarterly pre-tax profits falling from an average of RM125m in FY21 (FYE June) and RM95m in FY22 to a loss of RM23m in FY23 as UK inflation rates surged 1.8%/7.8%/12.7% in the respective years (Fig 1), driving up power costs and interest expense. As at Oct 23, the UK inflation rate had moderated to 6.1%, which should translate to improved earnings for Wessex Water and could pave the way for its return to profitability as early as 2HFY24F. We note that Bloomberg consensus is also projecting a strong rebound in earnings for UK water companies (Fig 2). Given this and the sustained strength in pre-tax profits at Power Seraya as seen recently in 1QFY24 (Fig 3), we raise our FY24/FY25/FY26 net profit forecasts for YTLP by 46%/20%/14%. We now expect improvements at Wessex Water to partially offset the impact of declining contribution from Power Seraya due to normalisation of margins, as we expect its retail contracts will be renewed at lower margins. Consequently, our SOP-based TP increases to RM3.00 (from RM2.40).

Potential Growth Opportunities Over the Next 3-5 Years

We continue to believe YTLP is well-positioned to benefit from Malaysia’s National Energy Transition Roadmap’s (NETR) electricity exports ambition given its entrenched market position in Singapore and past experience in the power business domestically. Its planned 500MW unique green energy data centre, strategically located in Johor, offers another growth angle as it stands to benefit from spillover demand arising from the 60MW annual capacity cap imposed in Singapore. YTLP is also looking to jointly develop a RM4.5bn waste-to-energy plant in Selangor with a waste handling capacity of 2,400MT/day and an initial electricity generation capacity of 58MW.

Valuations Remain Attractive Despite Recent Rally; Reiterate Add

YTD, YTLP’s share price has rallied 231% (vs. a 3% decline in KLCI) yet the stock has derated on a rolling one-year forward P/E basis from 12.5x to 7x currently (Fig 6) as it has lagged the >5.5x rise in Bloomberg consensus one-year forward net profit expectation (Fig 7). Hence, we feel the current price has yet to fully price in its structurally higher earnings base now vs. the past (Fig 8) on the back of a favourable balance within Singapore’s electricity supply market, prospective turnaround at Wessex Water and buoyant longer-term prospects with a slew of potential growth projects currently being explored. Key downside risk: sharper-than-expected normalisation in electricity sales margins.

Source: CGS-CIMB Research - 1 Dec 2023