Over the near term, YTLPOWR’s earnings will be driven by improved profitability of PowerSeraya (due to higher EBITDA/MWh and efficiency gains), while a planned RM15b YTL Green Data Center Park in Johor will broaden its earnings base over the longer term. We maintain our forecasts, TP of RM1.09 and OUTPERFORM call. Its dividend yield is decent at >5%.

We came away from a recent engagement with the company feeling positive on its earnings outlook. The key takeaways are as follows:

1. The annualised FY23 EBITDA/MWh for PowerSeraya of SGD45 matches the rates during the pre-LNG terminal period of SGD48 in FY11, SGD43 in FY12 and SGD42 in FY13 (FYE Jun). Recall, the commencement of the Singapore LNG terminal in May 2013 which triggered the “take or pay” LNG supply agreement partly caused PowerSeraya’s EBITDA/MWh to decline from SGD36 in FY14 to as low as SGD7 in FY19. However, these agreements have ended between 2020 and 2023, resulting in an improvement in PowerSeraya’s EBITDA/MWh to SGD23 in FY21 and SGD27 in FY22, and further in FY23 (see charts on Page 2).

Apart from higher EBITDA/MWh, PowerSeraya’s earnings could also be driven by improved efficiency arising from better economies of scale backed by a larger market share (i.e., to return to >25% during the pre-LNG terminal period from 18% currently).

2. The newly acquired 396MW Tuaspring (completed in Jun 2022) reported quarterly PBT of c.RM100m each in 1QFY23 and 2QFY23. YTLPOWR guided for its IPP assets in Singapore (PowerSeraya and Tuaspring combined) to fetch an annual PBT of SGD400m (RM1.32b), vs. our slightly more conservative forecasts of RM1.07b and RM1.20b in FY23 and FY24, respectively. Recall, its power generation business in Singapore reported a PBT of RM591.4m in 1HFY23, which already surpassed the RM420.7b achieved for FY22.

3. With 60% of PowerSeraya’s installed capacity of 3,100MW nearing the end of its life-cycle, the company plans to covert half of that to hydrogen-fired power plant. The capex is still pending finalisation.

4. YTLPOWR is building a RM15b solar-powered data centre campus called YTL Green Data Center Park in Johor with a total capacity of 500MW by 2030. The RM1.5b Phase 1 with a capacity of 72MW is expected to come online by 1QCY24. Already, Sea Ltd (the parent company of Shopee e-commerce platform and Garena digital entertainment firm) has agreed to take up 48MW of Phase 1.

The project financing has been put in place comprising RM1.1b Islamic term-financing arranged by Maybank and OCBC Bank and the estimated project IRR is in the low-teens. We understand that there is upside potential to the project IRR for subsequent phases but for a start, the strategy is to first rope in big names such as Sea Ltd.

Meanwhile, 168MW capacity in the same data centre campus comprising eight individual data centre facilities will be co developed with GDS Holdings, a leading developer and operator of high-performance data centers in China. The first phase of this parcel will commence service next year.

5. Wessex Water will see a tariff hike of c.9% on average from 1 Apr 2023, which should be sufficient to offset the rising operating cost. We believe the overall impact on earnings is neutral, if not better.

Forecasts. Maintained. We have yet to reflect any contribution from the data centre project.

We continue to like YTLPOWR for: (i) its improved earnings prospects with the turnaround of PowerSeraya, (ii) the revised new tariff rate from April 2023 keeping Wessex Water’s earnings resilient, and (iii) huge earnings potential from the new data centre venture. In addition, YTLPOWR also pays above average dividend yield of >5%. YTLPOWR remains an OUTPERFORM and our top pick in the utilities space with an unchanged TP of RM1.09 based on sum-of-parts valuation (see below). Similarly, our TP has yet to reflect any enhancement from the date centre. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

Risk to our recommendation include: (i) stringent ESG standards in developed markets, (ii) regulatory risk in the power sector in Singapore, (iii) the failure of the new venture of data centre, and (iv) sustained losses at YES.

Source: Kenanga Research - 14 Apr 2023