Q4 FY2024 Quarterly Result

YTL Power announced the Q4 FY2024 quarterly result on Wednesday 21^st August, one day earlier than the usual Thursday evening. Net profit came in at RM1.1 billion, way above market expectations. A breakdown of the segmental pretax profits is tabulated below:

PowerSeraya earnings is down y-on-y as expected as the last year corresponding period saw very high pool prices that gave rise to extraordinary long generation profits to PowerSeraya. Another positive surprise is the turnaround of Yes 5G segment which was boosted by some project revenue in Q4. Investment holding activities PBT includes some fair value gain from the acquisition of Ranhill, which I missed out in my earlier projection.

PowerSeraya

Back calculations show that PowerSeraya achieved net profit of SGD189 million in Q4 FY2024, which is within my expected range of SGD180-200 million per quarter. This has also come down compared to last year Q4 even after I strip out the estimated SGD30m of long generation profit. The lower core net profit in Q4 FY2024 is due to low pool prices in Q4 FY2024 (April-June 2024) and lack of spikes in pool prices after Temporary Price Cap (TPC) measure was implemented from July 2023.

The prevailing low pool prices have somewhat affected retails contract margin as some of the retails contracts are linked to the pool prices. Hence I lower my earnings projection for PowerSeraya earnings by 10% from the Q4 FY2024 level to SGD170 million net profit per quarter in FY2025 and further down to SGD150 million per quarter in FY2026-FY2029 as the new CCGT units from Keppel and Sembcorp progressively come onstream in 2026.

From 2030 when RE import starts to come into Singapore, I expect PowerSeraya earnings to further come down to SGD500 million level a year, which is based on existing 2,000MW of existing CCGT capacity at 69% capacity factor and average SGD60/MWh of blended margin (retails + vesting).

Wessex Waters

Wessex turned around in Q4 FY2024 as expected after water tariff hike from 1^st April 2024. It registered a pretax profit of RM69 million or GBP12 million in Q4 FY2024. The turnaround was made possible due to much lower provisions for index-linked bonds in Q4 (Apr-Jun 2024) when inflation in the UK already dropped to near 2.0% level. The CPI increased slightly to 2.3% in July 2024.

For FY2025, I am forecasting similar level of profit from Wessex as in this Q4 FY24 until March 2025. From 1^st April 2025, Wessex will enter the next 5-year regulatory period.

Ofwat issued the second draft determination on the water tariffs for the next 5-year regulatory period for the water companies in the UK in the mid July 2024 with the final determination in December 2024. The second draft determination set the WACC for return on capital at 3.664% real which is significantly lower than the real WACC of 4.382% requested by the company, but is higher than the 2.92% approved for the current regulatory period of 2020-2025.

With the non-favourable draft determination of Ofwat, my earlier earnings projection for Wessex is seen to be too optimistic. Hence to be on the conservative side, I lower my earnings projection for Wessex to be based on the WACC set in the second draft determination, though the company is optimistic that the return on capital WACC shall improve in the final determination.

In short, I project Wessex net profit to be around GBP40 million in FY2025, rising to GBP49 million in FY2026 when the full effect of the new tariff determination will be reflected. Net profit of Wessex will rise progressively to GBP60 million by 2030 as the regulatory capital value (RCV) increases from GBP4.5 billion in FY2025 to GBP6.5 billion in FY2030.

Jordan & Jawa Power

Jordan & Jawa Power earnings are parked under Investment Holding activities. This segment registered steady PBT of around RM200 million in Q4 FY2024, after I strip out RM147 million from total Investment Holding PBT for fair value gain from the acquisition of Ranhill. The PBT of RM200 million for Jordan & Jawa Power corresponds to my earlier estimate of RM120-150 million of net profit contribution every quarter.

Going forward, the earnings contribution from Jordan Power will rise gradually as project loans are getting repaid, hence lower interest expenses. There is also some inflation adjustment on Jordan Power earnings especially in the components of O&M costs recovery and mining cost recovery.

Ranhill Utilities

The take over offer at RM0.995 from YTL Power to acquire Ranhill shares closed on 25^th July 2024 with minimal acceptance from the public. Yet YTL Power ended up with a majority stake of 53.194% in Ranhill. As the share price of Ranhill closed on 30^th June 2024 at a much higher price than the average cost of acquisition, YTL Power recognized a one-off fair value gain from the Ranhill acquisition, estimated to be RM147 million.

Going forward, I expect Ranhill net profit to substantially improve after the take-over by YTL Power due to synergies and cost savings, also due to the explosive new water demands arising from the booming data centre developments in Johor. I expect Ranhill to achieve net profit of RM50 million in FY2025 rising to RM100 million in FY2026-2027.

Water companies in Peninsular Malaysia are allowed to adjust water tariffs every 3 years after April 2024. Hence I expect Ranhill to do so and its net profit to increase to RM120 million in 2028 and then to RM150 million in 2031.

AI Data Centre

There has been numerous bad publicity on the AI data centre development by YTL Power in past few weeks such as many new data centres coming out in Johor which would increase competition to YTLP and delays in Nvidia Blackwell GPU shipment.

As far as I am concerned, I see no change to my earnings projection for the AI data centre segment of YTL Power despite all this noise.

As mentioned earlier, YTL Power has secured the first 100MW AI data centre deal with Nvidia which is already under construction and the first phase on track for completion in early 2025. Various reports stated that YTL Power has since secured another 80MW of AI data centre deal with a big cloud company, and LinkedIn posts by engineers suggest that this DC3 is also under construction now. So the revenue for YTLPower’s AI data centre business has been secured for at least 180MW of IT load, and any other new data centre announced to be built in Johor will not affect this revenue line.

There was some reports towards end of July 2024 saying that Nvidia Blackwell GPU production faced some delays of 1-2 months due to design issues. I see no issue from any such delay to YTL Power’s AI data centre progress as the first phase with Nvidia has always been earmarked to use Nvidia H100 GPUs, not Blackwell. Subsequent phases of the AI data centres may use Nvidia Blackwell GPUs when they are ready in 2025.

Revised Earnings Projection

There is no other revision made in the other business segments of YTL Power besides the changes highlighted above. I maintain the earnings projection for Yes 5G, UK Brabazon property, RE export to Singapore, colocation data centre, AI data centre , KL WTE project and PowerSeraya new 600MW hydrogen-ready CCGT.

I tabulated the revised net profit projection for YTL Power below:

YTL Power registered net profit of RM3.46 billion in FY2024 or EPS of 42.7 sen. Its net profit is expected to go up to RM3.75 billion or EPS of 46 sen in FY2025 arising from Wessex Waters’ turnaround, more meaningful earnings contribution from UK Brabazon property segment, maiden earnings contribution from RE export and data centres, partially offset by a lower earnings contribution from PowerSeraya.

YTL Power net profit is expected to breach the RM7.0 billion mark by FY2030 after the full earnings contribution from AI data centres and PowerSeraya new 600MW hydrogen-ready CCGT come into effect.

Valuation for YTL Power

With the latest Q4 result, YTL Power has become the cheapest utility stock in Bursa. YTL Power is trading at historical PER of just 8.8x, dropping to 8.1x in FY2025 and 6.5x in FY2026. In comparison, Tenaga is trading at 23x PER on FY2024 earnings and Petronas Gas at 20x FY2024 earnings.

To me, YTL Power should be trading at minimum PER of 10x and a fair PER of 15x, hence it should be trading at RM4.27 minimum or RM6.40 in 2024, rising to a minimum of RM4.62 to RM6.93 in 2025.

Over a longer term, I see not much challenge for YTL Power share price to test RM8.70 to RM13.00 by 2030.

               The original article was first published on 21 Aug 2024 at dragonleong.substack.com