YTL Power Strong Ending in Q4 FY2023 Results

YTL Power reported a super strong set of earnings for its Q4 ended 30 June 2023 as summarised below:

PowerSeraya as expected continued reporting strong earnings driven by strong electricity demand due to heat wave. Stripping out Jawa Power’s contribution of RM119.1 million, PowerSeraya contributed profit before tax (PBT) of RM948 million in this Q4 FY2023. In addition to continued strong retails margin due to supply tightness, PowerSeraya also reported extraordinary profits from selling additional power into the wholesale electricity market which saw high wholesale prices spiking to over SGD1,000/MWh in numerous occasions during the quarter.

With the EMA introducing the capping of wholesale power prices from 1^st July 2023 using a formula linked to generation costs, the wholesale power prices will be capped at around SGD400/MWh to SGD700/MWh, which is 2x to 3x of the Long Run Marginal Cost of electricity, and any extraordinary profits of PowerSeraya from selling long into the wholesale electricity market will be much lower from Q1 FY2024 onwards.

Looking at the Q4 FY2023 earnings contribution from PowerSeraya, I think that the “base” gross profit from retails electricity contracts may be estimated at:

   3,300 GWh x S$80/MWh = S$264 million per quarter

Minus out interest expenses of S$6.5m, depreciation charges of S$18.7m and operating costs of S$12.5m but added with PetroSeraya contribution of S$5.5m, the estimated “base” PBT from PowerSeraya is about S$232 million or RM800 million.

So the extraordinary profit from selling into the wholesale market was about RM148 million or S$43 million in Q4. This was entirely possible as following calculations show. Assuming 5% of PowerSeraya generation was sold long to the wholesale electricity pool and earned a gross margin of S$260/MWh then the long generation would have generated gross margin of:       3,300 GWh x 5% x S$260/MWh = S$42.9 million

Going forward, I will assume insignificant earnings contribution from selling into the wholesale electricity market and expect PowerSeraya to report steady gross profit of S$264 million as in Q3 FY2023. Profit before tax will be about S$232 million (after deducting S$6.5m of interest expenses, S$18.7m of depreciation charges and S$12.5m of operating costs, and adding S$5.5m profit contribution from PetroSeraya) every quarter for next 2 years. Net profit will come in at about S$192 million or RM650 million per quarter. So PowerSeraya alone shall contribute net profit of RM2.6 billion a year to YTL Power, or earnings per share (EPS) of 32 sen.

Potential listing of PowerSeraya

In a recent interview, YTL Chairman, Tan Sri Francis Yeoh mentioned that YTL Power could list up PowerSeraya and Wessex Waters should the market continue to under-value the assets of YTL. I reckon that it is the opportune time in 2024 or 2025 to list up PowerSeraya in view of its strong earnings in next 3 years due to supply tightness.

A quick check of comparator companies in SGX shows that Sembcorp and Keppel are trading at PER of 12x to 14x and dividend yield of 1.5% to 4.5%. Using my estimates above, PowerSeraya will report pretax profit of S$232m x 4 = S$928m for 2024 and 2025. Net profit will come to S$770 million, and hence a target PER of 12.5x will give a valuation of S$9.6 billion to PowerSeraya.

PowerSeraya cahsflows will be stronger at S$845 million a year (after adding back depreciation charges). Assuming a 70% dividend payout from net profit, PowerSeraya could declare annual dividends of about S$540 million. A target dividend yield of 5.0% would value PowerSeraya at S$10.8 billion.

Hence a listing of say 40% stakes in PowerSeraya on the SGX would potentially bring in S$1.0 billion for PowerSeraya to halve its debts and S$3.0 billion (or over RM10 billion!!) to YTL Power.

Jordan Power Ventures

The power plant project in Jordan is undertaken by Attarat Power (APCO) and has 2 units of 277MW power plants using indigenous oil share as fuel source. The project was originally developed by an Estonia power company Eesti Energia (Enefit). The concession agreement between the Ministry of Energy and Mineral Resources and National Electricity Power Company of Jordan (Nepco), and Enefit was signed on 30 April 2008. In 2010, YTL Power bought a 30% stake in the project. A 30-year power purchase agreement (PPA) was signed with Jordan in October 2014 after a 4-year joint development effort of Enefit and YTL Power.

In May 2016, YTL Power announced to have entered into equity agreements with its partners for the US$2.1 billion project. APCO’s existing shareholders, comprising YTL Power, Enefit and Near East Investment Co (NEI), signed the agreement to introduce a new shareholder, Yudean Group, to the project. Following the completion of the share transfers, APCO will be indirectly owned by YTL Power (45%), Yudean (45%) and Enefit (10%). The Jordan local partner NEI exited the project. The project then achieved financial closure on 16 March 2017 with financing agreements signed with the Bank of China and the Industrial and Commercial Bank of China to provide US$1.6 billion debt funding for the project.

YTL Power executive director Datuk Yeoh Seok Hong said the company welcome Yudean as its partner in jointly leading the development of the milestone project to support the Jordanian government in furthering its policy of energy independence.

“The 554MW oil-shale-fired power plant will cover a substantial portion of Jordan’s energy needs and reduce the kingdom’s import of oil products for power generation.

“The sponsors’ combined extensive experience in power generation and mining will drive the project to fruition, beginning a process for Jordan to achieve cost effective and reliable energy independence,” he said in a statement.

Jordan Power Sector

Jordan was among the highest in the world in dependency on foreign energy sources, with 96% of the country’s energy needs coming from imported oil and natural gas from neighbouring Middle Eastern countries (source: Wikipedia). This complete reliance on foreign oil imports consumed a significant amount of Jordan’s GDP. To address these energy problems, the National Energy Strategy for 2007-2020 was created which projects to boost reliance on domestic energy sources from 4% to 40% by the end of the decade.

Moreover, multiple attacks on the Arab Gas Pipeline from 2011-2014 which supplied 88% of the country’s electricity generation needs, forced the country’s power plants to burn diesel and heavy fuel oil, costing the treasury millions of dinars and pushing the national energy bill to record highs, over JD 4 billion (USD 5.6 billion).

A summary of Jordanian electricity source in 2018 is given below:

            Natural Gas     16,623 GWh (86.0%)

            Heavy Fuel            514 GWh (2.7%)

            Diesel                       17 GWh (0.1%)

            Wind                      720 GWh (3.7%)

            Solar                   1,441 GWh (7.5%)

            Biomass                     3 GWh (0.0%)

            Hydro                        14 GWh (0.1%)

             Total                19,331 GWh (100%)

 From August 2003, Jordan imported the bulk of its natural gas needs from Egypt via the Arab Gas Pipeline which supplied Jordan with approximately 1 billion cubic meters (BCM) of natural gas per year. Gas supplies from Egypt were halted in 2013 due to insurgent activities in the Sinai and domestic gas shortages in Egypt. In light of this, a liquified natural gas (LNG) terminal was built in the Port of Aqaba to facilitate gas imports. In 2017, a low-capacity gas pipeline from Israel was completed near the Dead Sea. As of 2018, a large capacity pipeline from Israel was under construction in northern Jordan which was expected to begin operation by 2020 and would supply the kingdom with 3 BCM of gas per year, thereby satisfying the bulk of Jordan’s natural gas consumption needs.

Jordan embarked on several solar projects with a total capacity of 400MW allocated in two 200MW tender rounds in 2015. First Solar signed a Build-Operate-Maintain contract with the Jordanian government for the 52.5MW Shams Ma’an Solar PV power plant with a 20-year PPA. The Shams Ma’an project was tendered in the first round and granted a very lucrative tariff of US 14.8 cents per kWh, while the second round drew much lower tariffs of 6.13 to 7.67 cents per kWh for each of the four 50MW projects. As a comparison, the generation cost using a combined-cycled gas turbine and imported natural gas at current crude oil prices of US$85/bbl is around US 10.0 cents per kWh.

APCO Oil Shale-fired Power Plants

The APCO oil shale-fired power plant project was proposed back in 2008-2010 to help Jordan reduce its dependence on imported fuel which fulfilled almost 90% of Jordan power generation needs. The gas pipeline supplying natural gas to Jordan suffered multiple attacks in 2011-2014, prompting the Jordan government to look for alternative energy source. Oil shale was the natural choice as it is abundant in Jordan. Oil share deposits underlie more than 60% of Jordanian territory and are estimated at 40 to 70 billion tonnes.

Enefit which is the national utility company of Estonia had years of experience in developing and running oil share-fired power plants in Estonia. The project was initially proposed by Enefit and agreed to by the Jordanian government. The total installed capacity of generating plants in Jordan was about 2,000MW in 2010, and the proposed 554MW oil share-fired power project would contribute 20% of total generation. Together with the proposed 400-500MW solar projects, Jordan would have achieved its goal of boosting reliance on domestic energy sources from 4% to 40% by 2020.

The APCO oil shale-fired power project was reported to have a total project cost of US$2.1 billion with debt funding of US$1.6 billion. Using back calculations with assumptions of a low teen project IRR, interest rate of 8.5% and debt service cover ratio (DSCR) of 1.25x, I estimate that the average power tariff for this oil shale-fired power project to be about US 12.5 c/kWh. At a minimum DSCR of 1.15x, the power tariff may be lowered to US 12.0 c/kWh.

Though this oil shale-fired power project may have slightly (15% to 20%) higher power tariff than a combined-cycle gas fired power plant at current oil prices, it has several other merits:

1.     It uses indigenous fuel which is abundant in Jordan, hence helping to reduce reliance on imported fuel

2.     Burning indigenous oil shale is far more reliable than using imported gas transported by long distance gas pipelines which have been subject to numerous attacks. If a major gas pipeline is damaged, then Jordan may plunge into national blackout at the instance of gas pipe damage and subsequently suffer from much reduced power generation for weeks or months while the gas pipeline is repaired.

3.     The power offtaker, NEPCO will be shielded from any sudden or prolonged surge in oil and gas prices as oil shale-fired power plant generation cost is not subject to fluctuations in oil & gas prices. This oil shale-fired power plant will be cheaper than any combined-cycle gas-fired power plant in generation cost when crude oil prices surge past US$100/bbl.

4.     Imported fuel pricing is subject to foreign exchange rate movements, hence NEPCO or any Jordan power generator’s generation costs are subject to FX movements. Generation costs will go up when Jordanian dinars weaken against the US dollars or other major currencies.

5.     The oil shale-fired power plant employs far more employees than a typical combined-cycle gas-fired power plant, as it has the mining part and involves much larger operational areas. This creates a lot more job opportunities for local people and business opportunities for supporting industries like local workshops and suppliers.

NEPCO has challenged that the power tariffs for this oil shale-fired power project were too high, and is seeking to get out of the PPA in legal proceedings in the arbitration tribunal of the International Chamber of Commerce in Paris. The main driver for the challenge was after Jordan managed to sign a relatively cheap gas supply agreement with Israel in 2016 when Brent crude oil prices dropped below US$50/bbl. Now Brent crude oil prices have been hovering around US$85/bbl level after surging past US$100/bbl in 2022. There is no guarantee that oil prices will not surge past US$100/bbl again in next 30 years. I think if Brent crude oil prices were to surge past US$100/bbl again and maintain above that level for few months, this arbitration case would have no meaning of proceeding forward.

However, as a gesture of goodwill, I reckon that APCO could try to lower the power tariffs to around US 12 cents/kWh level as long as the minimum DSCR would allow, or sweeten the deal by offering additional solar power at around US 7.0 cents/kWh. APCO could progressively install solar power at the mining site where oil shale has been mined over the years. An offering of 250MW solar power at US 7.0 cents/kWh would lower the blended power tariffs to about US 10.0 cents/kWh, the same level of power tariffs as of a combined-cycle power plant.

At the assumed project returns above, this oil shale-fired power project may bring in operating cashflows of some RM100 million per year to YTL Power for its 45% stakes in the initial years and up to RM400-500 million a year after all the project debts are repaid. Net profit contribution to YTL Power is expected to be around RM50-100 million a year (after factoring in depreciation charges), progressively increasing to RM350-400 million a year after all project debts are repaid.

In the Q4 FY2023 results, Jordan power joint venture contributed profit before tax of RM350 million. The discrepancy over my estimation is probably due to significant profit in the mining operations and the operations & maintenance (O&M) operating company. The company statement also mentioned about higher interest income from the Jordan JV, which I suspect is from the shareholders’ loan. This quarter also saw the company recognise some accrued technical service income following the commercial operations of the 2 power units in Jordan.

Wessex Waters continues to improve

Wessex Waters turned in a smaller pretax loss of RM57 million in Q4 FY2023 as it again accrued a non-cash provision of RM54 million for index-linked bond interests. This is nonetheless disappointing as the 9% increase in water tariffs secured by Wessex from 1^st April 2023 is apparently not enough to offset against higher operating costs and interest expenses. Rough reconciliation of the profit is as follows:

            Q3 Pretax Loss            RM (47.2) m

            Add back accruals       RM  75.0  m  

            Minus latest accrual   RM (54.0) m

            Water tariff hike           RM  88.2 m    (quarterly revenue RM980m x 9%)

            Inflated Opn costs      RM (119.0) m    (higher operating costs and interest expenses)

            Q4 Pretax loss             RM (57.0)   million

As inflation (>7%) is still high in the UK, Bank of England is expected to continue raising interest rates in coming months after the latest hike of 0.25% in early August 2023 to about 5.0%. Hence, Wessex may continue to report PBT lower than my projected quarterly PBT of RM130m to 170m as operating costs continue to go up and there may be further provisions on its index linked bond interests.

I hope that Wessex will be able to secure another water tariff hike of about 10% for period starting 1^st April 2024 so that its pretax profit will get a lift towards the normal range of RM130m – 170m from Q4 FY2024 onwards.

As inflation and interest rates are high in the UK, so now it may not be a good time to do a listing of Wessex Waters as it will be difficult to fetch a good valuation of 1.5x to 1.6x Regulated Capital Value (RCV). The 3 listed water companies in the UK now trade at valuation of around 1.0x (Pennon) to 1.15x (United Utilities & Severn Trent) only. I reckon that a better time for listing of Wessex may be in 2025 when UK inflation will have subsided and Wessex’ RCV will have expanded by another few hundred million pounds sterling. The difference in valuation can be large:

 2023:  At 1.1x RCV of £3.7b = £4.1b minus net debt £2.3b, equity value = £1.8b (RM10.6b)

 2025:  At 1.6x RCV of £4.0b = £6.4b minus net debt £2.5b, equity value = £3.9b (RM23.4b)

YTL reports strong Q4 Results too

YTL Corp also reported very strong quarterly results for Q4 FY2023 boosted by both YTL Power and MCement. The breakdown of its PBT is summarised below:

The cement and building materials division reported a strong quarter. The bulk cement selling price remained at around RM380/MT while coal prices have fallen significantly in this April-June quarter compared to the Jan-March 2023 quarter.

Let’s take a look at MCement Q4 quarterly results compared to its Q3 FY2023:

Revenue in Q4 increased slightly and cost of sales only dropped 2% which is much lower than expected given that coal prices had fallen by a larger % in Q4 vs Q3. Anyway in Q4, MCement achieved EBITDA of RM242 million, annualised to RM968 million which is not too far from the company target of RM1.0 billion EBITDA a year.

MCement registered decent operating cashflows of RM465 million for FY2023. Minus out operating cashflows of RM277 million in 9 months ended 31 Mar 2023, the company recorded operating cashflows of RM188 million in Q4 FY2023 alone annualized to RM750 million. Allowing for capex, MCement will still have easily RM600 million of free cashflows a year, which will support dividend payouts of 30 sen a share. This will provide almost RM400 million of annual dividend income to YTL Corp who owns 78.9% stakes in MCement.

Strong Operating Cashflows for YTL

YTL achieved a record EBITDA of RM6.9 billion in FY2023, a 32% increase from RM5.4 billion in FY2022. Operating cashflows before capex and working capital changes amounted to RM4.08 billion in FY2023, minus off capex of RM2.34 billion, free cashflows amounted to RM1.74 bilion in FY2023. Going forward, I expect operating cashflows to improve further in FY2024 powered by a full year of strong contribution from PowerSeraya (compared to just 2 quarters of strong earnings from PowerSeraya in FY2023). Full year operating cashflows may hit RM5.0 billion and free cashflows may top RM2.5 billion for FY2024 & FY2025, easily supporting a dividend payout of RM1.0 billion a year for FY2024 and FY2025.

Multiple Re-rating Factors for YTL Group of Companies

Despite the latest strong quarterly results and the recent stellar share price rally, there are still multiple re-rating factors for YTL group of companies in coming quarters:

·       Continued strong earnings from PowerSeraya contributing >RM600 million net profit every quarter to YTL Power

·       Potential listing of PowerSeraya on SGX, which may potentially fetch a valuation of close to SGD 10 billion

·       Turnaround of Wessex earnings after interest rate hike cycle in the UK ends, high inflation starts to cool off and water tariff revision for 2024

·       Potential listing of Wessex Waters in in 2025-2026 which may fetch a valuation of over RM23 billion

·       Favourable outcome from the international arbitration on Jordan power venture which will enable it to fully realise PPA earnings of over RM200 million a year

·       Maiden earnings contribution from the first phase of green data centre project from Q3-Q4 FY2024

·       Maiden earnings contribution from the digital bank venture from 2025

·       Potential turnaround of Yes 5G business from 2024 after 5G coverage reaches 80% nationwide

·       Financial close for the Waste-to-Energy (WTE) power plant project in Rawang

·       Potential securing some of the RE power export to Singapore from 2024-2026

·       Continued strong earnings and dividend payouts from MCement

·       Potential placement of MCement shares to strategic investors at over RM4.00 per share to improve public spread (YTL owns 78.6%) and to realise cash for YTL

·       Rolling out of mega infrastructure projects in Malaysia and new Indonesia capital city development in Nusantara to boost cement demand

·       Strong rebounds in YTL shopping malls and hotels business division

·       Strong dividend payouts from YTL Power (15-18 sen) and YTL (9.5 sen) from FY2024

·       Potential clinching of MRT3 package by YTL construction arm

·       Potential revival of KL-Singapore High Speed Rail (HSR) project

·       Potential monetisation of assets by YTL – injection of unlisted hotels and shopping malls into the REIT, monetisation of some landbank at Niseko Japan, potential listing of Japan Niseko assets on Japan stock exchange, potential disposal of peripheral assets and land parcels etc.