Q2 FY2024 Quarterly Results Continued to be Strong

YTL Power continued to deliver excellent sets of results for the quarter Q2 FY2024 with net profits totalling RM845 million, some 325% higher than last year corresponding period. A breakdown of segmental contributions to the profit before tax (PBT) is as follows:

PowerSeraya

The main profit driver for YTL Power in this Q2 was again PowerSeraya which delivered profit before tax of RM1,033 million, which is slightly better than Q1 PBT of RM1.025 billion. As suggested before, PowerSeraya’s gross margin will remain healthy until 2026 as there will not be any new power plant capacity coming into the market in next 2 years while power demand continues to grow amidst heat waves and strong demand from new data centres and commercial & industrial sectors.

After minus out 17% tax rate, PowerSeraya’s net profit was still above SGD240 million for Q2, suggesting that it was not affected much by the weak pool prices in December 2023. Most of PowerSeraya’s electricity contracts are locked in vesting contracts that are revised every 2 years and retails electricity contracts that last for 6 months to now as long as 36 months, so its exposure to the wholesale market should be less than 5% and hence weak wholesale prices will not affect its overall profit margin much.

Going forward, the wholesale prices may remain weak as the Temporary Price Cap (TPC) mechanism is in place to cap any upside in selling long generation into the wholesale pool. As estimated before, such an extraordinary gain from selling extra electricity into the wholesale pool may amount to over SGD30 million a quarter as seen in Q4 FY2023. Also more rains in the month of December have reduced electricity consumption in Singapore, so retails electricity margin in 2H FY2024 may not be as high as in Q1 & Q2 FY2024. To be conservative, I forecast that PowerSeraya’s net profit may normalize towards SGD180-200 million a quarter for 2H FY2024. To be clear, such a profit level is normal if compared to those years in 2010-2013 when supply-demand was in a good balance, i.e. retails margin around SGD60/MWh which is comparable to the vesting contract margin now.

Wessex Waters

Wessex Waters registered a bigger loss in Q2 with pretax loss of RM69.47 million, after allowing for bigger provision of RM154.6 million for index-linked bonds. Without the provision for index-linked bonds, net profit would have been around RM85 million for the quarter. This is inline with the approved water tariffs for this 5 year regulatory period from 1 April 2020 to 31 Mar 2025, where the allowed return on capital has been fixed at WACC of 2.92%:

     RCV of GBP4.0 billion (as of 31 Mar 2023) x WACC of 2.92% = GBP116.8 million a year

     minus estimated interest expenses of GBP84 million a year, net profit will be about GBP33 million for FY2024.

There are a few tariff components in the water tariffs:

·         Pay as you go (PAYG) – this reflects the allocation of the efficient totex baseline

       to costs that are recovered from revenue in 2020-25. The proportion of totex not

       recovered from PAYG is added to the RCV which is recovered over a longer

       period of time.   

·         Allowed return on capital – this is calculated based on Ofwat’s assessment of the

              allowed return on capital multiplied by the average RCV for each year.

·         RCV run-off – this reflects the amount of RCV that is amortised from the RCV in

               the period of the price control.

·         PR14 reconciliations – this reflects the application of out/underperformance

               payments from PR14 through revenue adjustments in 2020-25.

·         Corporation tax allowance – this is estimated from projected corporation tax

               rates, profit forecasts and assumed levels of tax relief contained in the financial

               model for the draft determination.

·         Grants and contributions – this represents revenue that the water company expects  to be received from developers in respect of work undertaken by companies to service new developments. It includes income from connection charges, infrastructure charges and section 185 diversion recharges. The total grants and contributions amount deducted from totex may not agree to this amount, as the company only includes grants and contributions income relating to the price control (and some income is outside the price control).

·         Non-price control income – income from charges excluded from the price

               controls. For example, this includes bulk supplies, standpipes, unmeasured cattle

               troughs, and other services. In a change from the draft determination, Ofwat also

               now includes diversions recharges which are in respect of the New Roads and

               Street Works act 1991 activities and other non-section 185 diversions. Ofwat   

               deducts the forecast income from these charges from the allowed revenue,   

               because costs relating to these charges are included in the calculation of allowed

               revenue.

Hence, if the various tariff components correctly compensate the water company for the various costs, then the Allowed Return on Capital component will be the operating profit for the water company for the year, i.e. the approved WACC multiplied by the RCV of the year. Deduct off interest expenses, we can derive the net profit for the year.

Due to extraordinarily high inflation in the UK in 2021-2023 post Covid-19 pandemic, Wessex has been under-compensated on the operating costs (totex) to the tune of GBP 20 – 30 million a year. This is because the Pay-as-you-go revenue was approved in 2019 and based on the projected costs of around GBP200 million a year for FY2021-2025, but actual operating costs over-shot such projection in 2022 & 2023, hence Wessex had recognized less profit partly due to this under-recovery of opex.

Going forward, such under-recovery of opex will become insignificant as UK inflation cools off, as evidenced in the results of Q1 and Q2 FY2024 where Wessex was able to recognize net profit (before provision for index-linked bonds) of close to GBP20 million a quarter, which is the approved return on capital.

For Q4 FY2024 (ended June 2024), Wessex will be able to report higher earnings after it secures another round of water tariff hikes of between 3.3% to 7.3% for FY2025 starting from 1 April 2024. This is also inline with the higher RCV on 31 Mar 2024, which is estimated to be GBP4.3 billion. Hence the net profit can be estimated at:

         GBP4.3b x 2.92% = GBP126 million for FY2025 operating profit

         minus estimated interest expenses of GBP86 million, net profit = GBP40 million

If UK inflation cools further to below 3.0% p.a., then provisions for index-linked bonds can come down to below GBP30 million a year, so Wessex can report a net profit of at least GBP10 million a year.

The numbers will look very encouraging if the proposed capex plan of Wessex is approved for the next 5 year regulatory from 1 April 2025 to 31 Mar 2030. All of the water companies in the UK have proposed substantial increase in the capex plan to meet the more stringent ESG requirements. Wessex has proposed a total capex plan of GBP3.5 billion for the 5 years to 2030. Ofwat may cut some 8%-10% of the proposed capex plan, but irrespective of this, the RCV of Wessex may jump up to GBP4.6 billion by 31 Mar 2025, and if the approved WACC is 4.5% for 2025-2030, then the allowed return on capital may jump to:

      GBP4.6b x 4.5% = GBP207 million for FY2026

      minus estimated interest expenses of GBP90m and provisions for index-linked bonds of  

      GBP26m, net profit may hit GBP90 million

For the next 5-year regulatory period 2026-2030, I expect the WACC to be substantially higher at about 4.5% as prevailing interest rates in the UK are already over 4.50% since 2023, so that water companies in the UK can earn a reasonable return on equity of 4.5% or so. Based on the proposed capex plan, RCV may jump to over GBP7.0 billion by 31 Mar 2030, Wessex’s operating profit may hit GBP7,000m x 4.5% = GBP315m and net profit may top GBP100 million for FY2031.

Jordan Attarat Power

Jordan Attarat Power contributed PBT of about RM90 million in Q2 (Investment Holdings activities PBT of RM126.75 m minus estimated PBT of RM35 million from Jawa Power). This seems to be close to the full PPA payments plus O&M company profit plus mining company profit and shareholders’ loan interest income, estimated earlier at RM500-600 million a year.

As projected earlier, the ongoing international arbitration case between Nepco and Attarat Power company would be settled soon due to the natural gas supply disruption to Jordan after the break-out of Israel-Hamas conflicts in Gaza. Though we may have not seen any official statement from the company, the Q2 results already indicate on a favourable outcome for YTL Power.

Yes 5G

The Telecommunications (Yes 5G) division continued to register losses in Q2, as the marketing effort in grabbing retails market share for its 5G services has been very slow and the addition of new 5G subscribers has not been fast enough to reach critical mass for the breakeven point. As the 5G coverage has reached 80% in Peninsular, I expect YTL Yes to ramp up marketing efforts beyond Klang Valley soon and hopefully it will get another 1 million or so new 5G subscribers within 2024.

Potential valuation of YTL Power

YTL Power registered a net profit of RM845 million in Q2 FY2024 and RM850 million in Q1 FY2024, which represent more or less the new normal of quarterly profit for the company. This is without any extraordinary items like commissioning profits from Jordan and extra long generation into the pool from PowerSeraya in Q4 FY2023 but still extra high provisions for index-linked bonds in Wessex as in Q1 FY2024.

Going forward, I still expect YTL Power to achieve normalized net profit of around RM850 million per quarter, annualized to RM3.4 billion a year or EPS of 42 sen. YTL Power registered strong operating cashflows (before working capital changes and capex) of RM3.0 billion in 1H FY2024, annualized to RM6.0 billion. Deduct assumed capex of RM3.2 billion a year, YTL Power would easily have free cashflows of RM2.8 billion or 35 sen per share every year. YTL Power would afford paying dividends of 16 sen a share or RM1.3 billion every year to support its parent YTL Corp’s own dividend target payout of RM1.0 billion a year.

As comparison, I summarise below the valuation of utilities peers in Bursa:

As can be seen above, YTL Power is trading at an unjustifiably low PER of below 10x, not even half of Petronas Gas’ valuation. Petronas Gas and Dialog though making less profit than YTL Power are trading at about 20x PER. If re-valued to Tenaga’s valuation of 17.3x PER, YTL Power should be trading at RM7.26; if re-valued to PetGas/Dialog valuation of 20x PER, YTL Power would be trading at RM8.40. To me, YTL Power should at least trade at 15x PER or RM6.30 per share to be comparable with Tenaga which has similar profit level of over RM3.0 billion.

When Wessex turns around from FY2025 and Jordan Power recognizes full PPA payments, YTL Power should be able to maintain a net profit of about RM3.4 billion a year from its existing operations of PowerSeraya, Wessex, Jordan Power and Jawa Power. When Yes turns profit from FY2025, 1^st phase data centre starts contributing profit from Q4 FY2024 and AI data centre business starts to contribute profit from FY2025, YTL Power net profit will gradually improve further towards RM4.0 billion or EPS of 50 sen, and its share price should trade above RM6.00 even if based on 12x PER.

YTL Corp also registered excellent quarterly results

YTL registered an excellent set of results for Q2 FY2024, powered by strong earnings from 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 RM360-380/MT while coal prices have fallen significantly since March 2023. The increase in earnings from MCement in this quarter was driven by a small increase in revenue and a drop in cost of sales from the preceding quarter (as shown in the table below).

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. 

YTL achieved an EBITDA of RM4.91 billion for 1H FY2024, annualised to RM 9.8 billion for FY2024. YTL achieved operating cashflows (before working capital changes and capex) of RM3.6 billion in 1H FY2024, annualised to a whopping RM7.2 billion. Deduct assumed capex of RM4.0 billion a year, free cashflows may top RM3.0 billion a year for FY2024 & beyond, easily supporting a dividend payout of RM1.0 billion a year for FY2024 and FY2025.

Potential Valuation of YTL Corp

A comparison of valuation of listed conglomerates in Bursa Malaysia is tabulated below:

As can be seen above, YTL is trading at an unjustifiably low valuation of just 11.0x PER, less than half of Sunway’s valuation of 23.4x PER. For a diversified conglomerate with businesses ranging from construction, property, hotel, utilities, digital bank and data centre, YTL should be trading at PER of about 20x (to be on par with Sunway) or RM4.00.

Multiple Re-rating Factors for YTL Group of Companies

Despite the latest strong quarterly results and 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 >RM700 million net profit every quarter to YTL Power
• Potential listing of PowerSeraya on SGX, which may potentially fetch a valuation of  SGD 8.0 billion
• Strong rebounds in Wessex earnings after interest rate hike cycle in the UK ends, high inflation starts to cool off and water tariff hike from 1^st April 2024
• Potential listing of Wessex Waters in in 2025-2026 which may fetch a valuation of over RM20 billion
• Favourable outcome from the international arbitration on Jordan power venture which will enable it to fully realise PPA earnings and shareholders’ loan interest income of RM500-600 million a year
• Maiden earnings contribution from the first phase of green data centre project with SEA Group from Q3-Q4 FY2024
• Maiden earnings contribution from the first phase of AI data centre project in collaboration with Nvidia from mid 2024
• Maiden earnings contribution from the digital bank venture from 2025
• Potential turnaround of Yes 5G business as early as Q3 FY2024 and decent profit contribution of RM260 million and operating cashflows topping RM1.0 billion a year from 2024 after it secures another 1.0 million 5G subscribers
• Financial close for the Waste-to-Energy (WTE) power plant project in Rawang
• Potential securing some of the RE power export to Singapore from 2025-2026
• Successful commissioning of the new 600MW hydrogen-ready CCGT by PowerSeraya and new profit contribution from this new unit of at least SGD200 million a year from 2028
• Continued strong earnings and dividend payouts from MCement
• Potential placement of MCement shares to strategic investors at over RM5.00 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.