RHB Investment Research Reports

YTL Power - AI-DC Game Plan Still on Track; Reiterate BUY

Publish date: Fri, 24 May 2024, 11:00 AM
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  • Keep BUY and new MYR6.68 TP from MYR4.69, 24% upside, c.2% FY25F (Jun) yield. The earnings moderation for YTL PowerSeraya in 3QFY24 is largely anticipated due to weaker pool prices and lower retail margins. Moving forward, such earnings moderation will be largely anchored by Wessex Water’s earnings recovery. We remain positive over its long-term earnings potential from AI-DC development, and the near-term catalyst will be the conclusion of the offtaker for its first 20MW (out of 100MW) AI-DC.
  • Within expectations. 9MFY24 core profit of MYR2.5bn (+1.5x YoY) came within expectations at 78% and 80% of ours and Street’s full-year estimates. First interim DPS of 3sen was declared (3QFY23: 2.5sen).
  • 3QFY24 core profit up 31% YoY to MYR696m on stronger power generation (+5% YoY; from lower interest costs and a stronger SGD despite lower pool prices), masking softer numbers from Wessex Water and widened losses from the telco arm. QoQ, 3Q24 core earnings fell 16%, largely due to lower pool prices and retail margins for power generation segment.
  • Outlook. The earnings moderation for PowerSeraya in 3QFY24 is largely anticipated due to weaker pool prices and lower retail margins. We reckon such earnings normalisation will happen gradually in FY25 and FY26 as retail contracts still accounted for more than 70% of the output. Meanwhile, management is still in discussions to lock on offtakers for its first 100MW Phase 1 AI-DC and we understand YTLP is in advanced discussions with potential clients for a possible 20MW portion. Management remains confident to kick-start a major part of the project in 12 months. YTLP is also considering leasing the remaining 16MW (out of the 48MW) of its conventional DC to an AI player or allowing YTLComms to convert into AI DC with H100 servers. As seen in its recent results, Wessex Water’s numbers may remain affected by accounting anomalies/additional finance costs from index-linked bonds, which have no cash impact. However, we expect it to recover more meaningfully in FY25F, backed by annual tariff adjustments. Wessex Water also submitted its 5-year business proposal (2025-2030) to the water services regulation authority (Ofwat), including a higher return and capex allocation. The outcome is likely to be known by end of the year.
  • We raise FY25F-26F earnings by 5-16% after factoring earnings contribution from AI-DC and stronger recovery from Wessex Water. Our SOP-based TP is lifted to MYR6.68 from MYR4.69 as we impute a higher AI- DC valuation assuming 15x EV/EBITDA (from 12x previously; still below global peers’ average of 18x) with a 60% ramp up (from 20% ) in 100MW DC, USD3bn capex, and 14% IRR. We also applied a 2% ESG discount based on its 2.9 ESG score. Downside risks: Weaker-than-expected plant performance and higher-than-expected operating costs.

Source: RHB Research - 24 May 2024

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