Q4FY2022 Quarterly Result Summary

YTL Power announced a decent set of results for Q4 FY2022 with reported net profit of RM193 million, a big turnaround from last year correspondence period loss of RM490 million. The big loss in Q4 FY2021 was mainly due to re-measured deferred tax charges in Wessex Waters.

As can be seen above, EBITDA went up 51% y-on-y to RM735 million and up 34% against Q4FY2021. This is encouraging as the lower earnings in Wessex Waters was well covered by a timely rebound in PowerSeraya earnings, as shown in the table below. The Q4FY2021 net profit of RM193 million or EPS of 2.38 sen is a significant milestone as there was no big exceptional item in the quarter, which implies a steady-state annualized profit of RM772 million or EPS of 9.52 sen. This would be the highest profit level since FY2017.

A summary of the segmental breakdown is tabulated below:

The Multi-Utilities business registered a 41% rebound in profit before tax against Q3FY2022 and 607% up against Q4FY2021 due to better pool prices and retails margin achieved by PowerSeraya in a tight electricity supply market in Singapore.

The Water & Sewerage segment recorded a huge drop in PBT mainly due to higher operating costs and interest accretion on index-linked bonds.

The higher loss registered by the Telecommunications segment was due to lower project revenue recorded during the quarter.

Cash Flows for FY2022

YTL Power registered strong operating cash flows of RM2,418 million for the full year of FY2022.

                                                                        RM million

Cashflows from operating activities               2,418

Interest paid                                                    (882)

Payment to post-employment benefits          (134)

Tax paid                                                          (72)

Dividend, grant & interest received                 397

Repayment of lease liabilities                         (149)

Total cashflows before capex                         1,578

Total cashflows before capex amounted to RM1,578 million for the full year of FY2022, supporting a total dividend payout of RM365 million (or 4.5 sen per share). Capex was high at RM2.6 billion for FY2022, comprising mainly the Kulai land purchase and acquisition of Tuaspring in Singapore.

With the sale proceeds from the disposal of Electranet, YTL Power was able to pare down borrowings by RM2.6 billion from RM30.3 billion to RM27.7 billion as of 30 June 2022.

Increasing Dividend Payouts from FY2023

YTL Power declared a final dividend of 2.5 sen, bringing total dividends to 4.5 sen for FY2022. With the strong operating cash flow of approximately 19 sen per share for FY2022 and possibly higher for FY2023, we can probably expect a higher dividend of 7.0 sen to be declared for FY2023.

At current share price of 73 sen, YTL Power is trading at a historic dividend yield of 6.2%. If it can declare higher dividend of 7.0 sen for FY2023, I would expect its share price to gradually move up towards RM1.00-1.10 in next 12 months to support similar yields of 6.2%-7.0%.

Updates on Wessex Waters

The UK is experiencing the highest inflation rates (over 10.0%) in decades, so it is not surprising that operating costs at Wessex have surged up. Wessex’ operating costs amounted to £347 million for FY2021, a 10% increase would have resulted in £35 million extra costs a year or roughly RM47 million a quarter. Wessex’ total borrowings were at £391 million as of 31 Mar 2021, a 1.5% increase in interest rates would have resulted in extra £5.8 million in interest costs per year or RM8 million per quarter.

I understand that there is certain mechanism in the water tariffs to compensate for higher inflation and higher interest rates but I suspect any meaningful tariff adjustment may only come in from next regulatory year (1^st April 2023). So there is a lag effect in tariff compensation and we may expect Wessex earnings to remain depressed for the next 2-3 quarters before it would climb back to RM90-100 million level per quarter.

Water regulated assets in the UK are typically valued at a premium to the regulated capital value (RCV). There are three water utilities listed on London stock exchange - United Utilities, Svern Trent and Pennon. These 3 companies having been trading at dividend yields of 3.3%-4.0% and 1.3x to 1.5x RCV in past 6 months. Their share prices have been relatively stable YTD despite the Russian-Ukraine war, high inflation and rising interest rate environments.

On 15^th July 2022, New York-listed investment group KKR reached a deal to invest £867 million for a 25% stake in Northumbrian Water Group, which was jointly owned by several companies within CK Group, the business empire of Hong Kong Billionaire Li Ka-Shing. The deal valued Northumbrian Water at £3,468 million equity value. The Enterprise Value (EV) for Northumbrian was then at £3,468m + £2,962m (borrowings) = £6,430m. With a Regulated Capital Value (RCV) of £4,196.4 million, Northumbrian Water was hence valued at 6,430/4,196.4 = 1.53x RCV.

The deal was fair at a premium to the normal trading range of 1.3x – 1.5x RCV of listed water companies, as it was for a substantial stake of 25%. Mr. Li Ka-Shing made a 44% return over his original invested equity value of £2,200 million for Northumbrian in 11 years. I believe that Mr. Li had found the timing ripe for a partial exit from the UK water company which would face high inflation and lower returns in this regulatory 5-year period, and it was almost perfect for him to find a willing buyer from the US. KKR will find this UK water asset attractive at this time as UK pounds sterling has depreciated by 16% against US dollars.

This again reinforces my earlier call for YTL Power to consider taking partial profit on Wessex Waters either by listing up 30%-40% of stakes in London stock exchange or by finding a buyer from the US / Canada for a strategic 25% - 30% stake in Wessex Waters. With the recent deal on Nortumbrian and trading valuation of the 3 listed water companies, there is no reason for me to change the valuation for Wessex Waters, being at 1.0x RCV or RM6.9 billion on the Conservative Case to 1.6x RCV or RM18.7 billion on the Bluesky case.

PowerSeraya & Multi-Utilities

The Multi-utilties segment delivered a pretax profit of RM191 million in Q4 FY2022, annualized to RM764 million, which is well within my earlier projected range of full year pretax profit for PowerSeraya (SGD171m – SGD371m). The earlier projection was made without the recently acquired Tuaspring asset and it assumed an exchange rate of SGD1.00 = RM3.00.

Now with the completion of Tuaspring in early June 2022, PowerSeraya effective generating capacity will increase by about 20% or 396MW. Assuming similar generating margin, PowerSeraya pre-tax profit may go up 20% to SGD200m – SGD445m. With Singapore dollars appreciating by 6% against ringgit to SGD1.00 = RM3.18, the pretax profit contribution of PowerSeraya will go up even higher in ringgit terms. Hence, at the lower end, PowerSeraya will contribute pretax profit of SGD50m x 3.18 = RM159m per quarter to YTL Power. At 5% dividend yield, PowerSeraya would be valued at RM12.7 billion, which is well within my earlier valuation range of RM8.6 – RM18.7 billion.

With gas supply obligations more relaxed from 2023, PowerSeraya may look for cheaper source of fuels for its gas turbines. One of the options it could consider is green hydrogen. If it could source for green hydrogen at lower than USD2.00/kg (which India is aiming to produce lower), PowerSeraya could co-mingle up to 20% of its fuel requirement with green hydrogen and make its generation costs lower than current level using LNG at Brent crude prices of USD100/bbl. If found feasible, these retrofitted turbines would generate much higher generation margin than other gas turbines in Singapore.

Improving Prospects

YTL Power’s venture in green data centre park is gaining traction with the launch of the first phase for the RM1.5 billion Sea Data Centre for Sea Ltd. This 72 MW facility is expected to be completed by the 1^st quarter of 2024. On 25^th August 2022, Johor Menteri Besar said the Johor state government was expecting RM15 billion worth of investment in YTL Green Data Centre Park over the next 10 years. I believe this data centre business segment will start making significant contribution to YTL Power earnings from FY2024.

On its 5G telco business, YTL Yes was the first to roll out 5G services in the Klang Valley in early June 2022. It has since gathered over 300k 5G users in a matter of weeks. Judging from the June quarterly result from the telco segment, I guess Yes will need to get another 1.0 million 5G users or convert from its existing 2.5 million 4G users to higher monthly fees (with higher 5G speed and data) before this segment will contribute meaningful earnings.

We will continue to wait for progress from Jordan power plant, pending an arbitration case with Jordan national utility Nepco. Due to years of under-investment in new generating capacity and heavy reliance on imported fuels, Nepco is in a tight spot in terms of financial performance, more so when energy prices are very high now. Though this YTLPower’s oil shale-fired power plant project in Jordan would be very good for the country, Nepco would still want to negotiate for lower fees from Attarat Power. I do not think that this project will be scrapped altogether as the plant is over 98% completed with billions of dollars of investment sunk in already, and YTL Power will be able to salvage something from the venture.

I maintain a valuation of RM3.85 to RM7.55 per share for YTL Power in the long run based on cashflow valuation or sum-of-parts valuation as derived in my earlier article:

https://klse.i3investor.com/web/blog/detail/dragon328/2022-04-22-story-h1621549755-YTL_Power_is_potentially_a_10x_Bagger

The current share price of RM0.73 for YTL Power is even lower than the most conservative valuation of 1.0x RCV for Wessex (RM6.9 billion or RM0.85 per share), which means we are getting all other businesses of YTL Power (PowerSeraya, Yes, green data centre park, Jawa Power, some RM2.0 billion net cash at holding level, Jordan power plant etc) for free.