We learned first-hand from YTLPOWR’s Wessex Water team in the UK of a potential significant hike in tariff during Regulatory Period 2025-2030 that goes hand-in-hand with a GBP3.5b (RM21b) capex programme, and its GBP2.5b (RM15b) Brabazon Bristol property project. We keep our forecasts relatively unchanged but raise our TP by 4% to RM5.44 (from RM5.22). Maintain MARKET PERFORM.

We visited Wessex Water in Clarverton Down, Bath, and its Scientific Centre and Water Recycling Centre in Saltford, Bristol, last week. The key observations are as follows:

• Acquired in 2002, Wessex Water is one of ten regional water and sewerage concessions in England and Wales. It has consistently been ranked the best water and sewerage company based on various metrics including service quality, customer satisfaction and environmental sustainability, according to industry regulators such as Ofwat (the Water Services Regulation Authority). It supplies over 282m litres of water per day to 1.4m people and 44,000 businesses, and treats over 888m litres of sewage per day produced by 2.9m people and 57,000 businesses.

• It has invested GBP9b (RM54b) since 1990 to improve service and benefit the environment. For Regulatory Period 2025-2030, it has submitted a GBP3.5b (RM21b) capex business plan (see Exhibit 5), up significantly from GBP1.5b (RM9b) during Regulatory Period 2020-2025. This will be largely driven by regulatory requirements on river health-led measures after a severe drought throughout the country in 2022. Wessex Water is still in negotiation with the authority on this capex plan. It expects the “final determination” for the plan by 19 Dec 2024, following the conclusion of the “draft determination” recently, paving the way for implementation on 1 Apr 2025.

• To improve river health, it has budgeted a record GBP400m to reduce discharges from storm overflows and a GBP900m on stripping nutrients out of treated wastewater discharges. It is also safeguarding rivers and groundwater through demand and leakage reduction. We understand that the leakage at the customer-end is c.20% of non-revenue water, which will be mitigated via smart metering.

• Post Regulatory Period 2025-2030, Wessex Water has long-term plans to ensure that the water supply is sufficient to meet future demand and to comply with environmental sustainability. These include converting the Mendip Quarries to a reservoir boasting a capacity of 29m litres at a cost GBP1.1b (RM6.6b).

• In view of its sustainable cash flows from the regulated water business, the UK holding company, YTL Utilities UK, is able to make use of Wessex Water’s financial sources efficiently to expand its YTL Land and Property UK unit. Currently, YTL Construction UK is the top 20 construction firm in the UK. With Wessex Water’s capex programme during Regulatory Period 2025-2030 and the YTL Property UK unit, the construction outfit should have sufficient projects to keep them busy in addition to other third-party projects. We understand that the construction unit will source their raw material from Asia making it more competitive against its British peers.

• Meanwhile, its property unit YTL Development (UK) is developing one of the largest master-planned developments in the UK, namely Brabazon Bristol. Brabazon is a GBP2.5b GDV 15-year township development project, on the brownfield Filton Airfield site. Its first phase started constructing 278 new homes at The Hangar District in January 2020 while construction of Phase 2 was launched in summer 2023 with the first homes scheduled for summer/autumn this year. Eventually, the project will grow to over 6,000 new rental apartments to flats for first-time buyers, open market houses and properties for retirement living. All homes are fitted with solar PV panels and electric car charging.

• This project includes three new schools and a higher education or research campus alongside creative office spaces, laboratories and advanced manufacturing facilities. There will be 1,514 beds for student accommodation. The Brabazon Park will be the largest urban park in the South West in 50 years. There will be the supersonic new Bristol conference centre - YTL Arena Bristol with a capacity of 17,000, making it a global top 5 venue for live music and entertainment.

Conclusion: We maintain our view that the potential significant tariff hike during Regulatory Period 2025-2030 coupled with the stabilising inflation in the UK should result in a turnaround in Wessex Water. Recall, Wessex Water’s profitability was hit by high interest cost due to the elevated policy rate in the UK on sustained high inflation. The UK registered seven months of doubledigit inflation between Sep 2022 and Mar 2023. It has since eased to 2% in May 2024.

Forecasts. We keep our forecasts relatively unchanged. We do not foresee meaningful contributions from Brabazon Bristol property project during our forecast period.

Valuations. Nonetheless, we raise our SoP-derived TP by 4% to RM5.44 (see Page 3) from RM5.22 to reflect the long-term impact of the Wessex Water’s tariff hike. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 6).

Investment case. We continue to like YTLPOWR for: (i) its earnings stability backed by various regulated assets globally, (ii) the strong near-term earnings prospects of PowerSeraya backed by gas inventory locked in at low prices, and (iii) its longerterm growth potential driven by its data centre and digital banking ventures. However, these have been fully reflected based on its current market valuations. Maintain MARKET PERFORM.

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. YTLPOWR’

Source: Kenanga Research - 12 Jul 2024