• Keep BUY and MYR6.68 TP, 29% upside and c.2% FY25F (Jun) yield. Post site visit, we remain positive on Wessex Water’s outlook given its excellent operational performance and the higher legal and regulatory capex requirements in order to preserve the environment and meet long term water demand. The outcome of the next 5-year business proposal will be known by the end of this year.

• Wessex Water visit. Last week, YTL Power hosted a visit to its operating unit, Wessex Water in the UK. We had a meeting with the management team at the office in Claverton Down, Bath, and visited the water recycling centre at Saltford, Bristol. Wessex Water is one of 10 regional water and sewerage businesses in England and Wales and has been consistently ranked as the best water and sewerage company, according to industry regulators. It supplies water to 1.4m people and c.44,000 businesses with >282m litres of water/day and offer wastewater treatment to 2.9m people and c.57,000 businesses with c.888m litres of sewage/day.

• Higher proposed capex in 2025-2030. 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 of GBP3.5bn over the next years (from GBP1.4bn). We understand that the significant spike is mainly driven by legal or regulatory requirements on river health led measures and could result in a c.30% increase in the average bill. The outcome is likely to be known by the end of the year.

• To handle extreme weathers and build reservoirs. UK has been experiencing more extreme weather in recent years. In 2022, certain water restriction measures such as hosepipe ban in some areas whereby non-essential use of hosepipes like watering garden and washing cars were prohibited. Following such event, water companies and government agencies are now re-evaluating strategies for water conservation and drought preparedness. There are also long-term plans to ensure long term water demand is met especially when there is a requirement to reduce underground water supply by giving back the water to the environment for sustainable abstraction and preservation. The Mendip quarries has been identified as a potential future reservoir site. The project is estimated to cost GBP1.1bn – it is still under the development stage and no final investment decision to be achieved. Wessex Water will push through this project in the upcoming regulatory review in 2031-2035.

• Stay BUY. Our SOP-based TP is kept at MYR6.68 with the incorporation of a 2% ESG discount based on its 2.9 ESG score. We remain positive over its long- term earnings potential from its artificial intelligence-data centre (AI-DC) development, while the near-term catalyst will be the conclusion of the offtaker for its first 20MW (out of 100MW) AI-DC. Downside risks: Weaker-than- expected plant performance and higher-than-expected operating costs.

Source: RHB Research - 10 Jul 2024