We expect YTLPOWR to report another strong set of quarterly results in 4QFY23 with net profit rising 10%-12% QoQ, driven by a 43% hike in Singapore power retail price in 2QCY23 and an average c.9% tariff hike for Wessex Water from Apr 2023. We raise our FY23 and FY24F profit forecasts by 26% and 34%, respectively, lift our TP by 25% to RM1.85 (from RM1.48) and maintain our OUTPERFORM call.

YTLPOWR’s share price has more than doubled YTD thanks to a 9x YoY jump in its 9MFY23 core profit to RM955.4m. The current full-year FY23 consensus net profit estimate of RM1.26b implies a 4QFY23F net profit of c.RM300m (vs. 3QFY23A core profit of RM528.4m). We expect YTLPOWR’s 4QFY23 net profit to beat the number handsomely as:

1. The Uniform Singapore Energy Price (USEP) jumped 43% to SGD373.7/MWh on average in 2QCY23 from SGD260.7/MWh in 1QCY23. As such, PowerSeraya is likely to report strong QoQ earnings in 4QFY23. Recall that YTLPOWR reported a pre-tax profit of RM806.4m for its power generation segment in 3QFY23.

2. Wessex Water is expected to turn profitable in 4QFY23 from pre tax losses of RM16.1m and RM47.2m in 2QFY23 and 3QFY23 respectively after an average c.9% tariff hike from 1 April 2023, which should be sufficient to offset the rising operating costs. The tariff hike was to adjust for UK Nov 2022 consumer price index.

We expect 4QFY23 net profit to rise 10%-12% QoQ to RM585m-RM590m as we expect a higher pre-tax profit of RM830m for the power generation unit with Wessex Water turning profitable at c.RM140m. This leads us to upgrade our FY23F forecast by 26% to RM1.54b from RM1.23b. We also raise the FY24F forecast by 34% to RM1.34b from RM1.00b as we adjust for higher earnings contributions from PowerSeraya and Wessex Water.

We forecast lower FY24F estimates as PowerSeraya’s earning is expected to normalise from the exceptionally high electricity price in 2HFY23. The USEP has fallen 55% from the peak of SGD492.1/MWh in May to SGD221.0/MWh in July (see chart on Page 2). However, the retail price is unlikely to fall to pre-Covid levels of below SGD100/MWh in the immediate term as there is no new plants powering up in Singapore for the next three years. Meanwhile, our forecasts have not reflected any contribution from the data centre project. We also keep our 5.0 sen NDPS forecast unchanged for FY23-FY24F (payout of 26%-30%) as cash is reserved for expansion.

Forecasts. We raise our FY23 and FY24F profit forecasts by 26% and 34% respectively. Having also rolled forward our valuation base year to FY24F, we increase our SoP-driven TP by 25% to RM1.85 from RM1.48 (see Page 2). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

We continue to like YTLPOWR for: (i) its improved earnings prospects with the turnaround of PowerSeraya, (ii) the revised new tariff rate from Apr 2023 keeping Wessex Water’s earnings resilient, and (iii) huge earnings potential from the new data centre venture. Maintain OUTPERFORM.

Risks to our recommendation include: (i) stringent ESG standards in developed markets, (ii) regulatory risk in the power sector in Singapore, (iii) the new data centre business fails to take off, and (iv) sustained losses at Yes.

Source: Kenanga Research - 15 Aug 2023