YTLPOWR’s FY22 results beat expectations largely due to strong numbers from PT Jawa Power. Looking forward, Wessex Water may face margin compression as operating cost rises. Meanwhile, a stronger war chest with c.RM3b proceeds from the disposal of ElectraNet coupled with several new ventures it started recently should provide growth catalysts. We maintain our FY23F numbers but reduce our SoP-based TP by 13% to RM0.97 (from RM1.11) as we switch our valuation for Wessex Water to DCF (from regulatory capital value). Maintain as OUTPERFORM. The stock offers dividend yield of c.7%.

FY22 core profit of RM258.6m exceeded our forecast by 45% and blew away consensus estimates of a RM27.6m net loss. The variance against our forecast came largely from stronger contributions from associates (we believe, especially PT Jawa Power in Indonesia). It declared a second NDPS of 2.5 sen, translating to a total of 4.5 sen for the full year which is unchanged from last year.

YTLPOWR turned around with a headline net profit of RM1.26b (vs. a RM143.2m net loss a year ago) thanks to the recognition of gains of c.RM1.3b from the disposal of EletraNet in 3QFY22. Segmentally, PowerSeraya continued to post higher earnings (+41% QoQ in 4QFY22; +51% YoY in FY22) on higher pool gains and retail margins due to improved market condition while Wessex Water’s earnings fell (-85% QoQ in 4QFY22; -23% YoY in FY22) given the higher operating cost (such as higher petrochemical prices for water treatment) and interest accretion on index linked bonds.

Meanwhile, YES continued to bleed red ink, while its local IPP reported RM21.4m pre-tax profit in 4QFY22, turning around from three quarters of losses (operating costs without revenue as the PPA had expired in June 2021) thanks to gains from the disposal of assets.

Many new ventures on the plate. YTLPOWR has been busy with new ventures of late, such as building YTL Green Data Center Park and it also intend to develop LSS both in Johor, (official ground breaking yesterday with RM15b value over the next 10 years) in addition to winning a digital banking license with Sea Ltd’s Shopee. With c.RM3b cash proceed from the disposal of ElectraNet, we believe YTLPOWR will continue to look out for new investment and in the past, the YTL Group have always expanded during economy downturn.

Keep OUTPERFORM. While we keep FY23F earnings unchanged, FY24 new forecast is introduced with net profit to grow 8%. We remain optimistic on YTLPOWR’s prospects on the back of sustainable turnaround in PowerSeraya and new exciting ventures. In rationalising our valuation method, we use DCF to value Wessex Water instead of regulatory capital value (RCV) and house-keeping on FY22A, our RNAV-driven TP is reduced to RM0.97 from RM1.11. Our OP rating is also supported by above-average yield of c.7%. There is no adjustment to our TP based on its 3-star ESG rating as appraised by us.

Risk to our recommendation include: (i) non-compliance of ESG standards set by various stakeholders, (ii) losses at YES worsening, and (iii) PowerSeraya failing to stay profitable.

Source: Kenanga Research - 26 Aug 2022