• Keep BUY, with new MYR5.68 TP from MYR5.94, 59% upside and c.2% FY25F (Jun) yield. We cut our FY25F-27F earnings by 5-6% after: i) Imputing the stronger MYR against different currencies, of which PowerSeraya and Wessex Water are largely dominated in, and ii) the rising exposure in USD upon the commercialisation of the artificial intelligence-data centre (AI-DC). We remain positive over YTL Power’s long-term earnings potential from its AI-DC development amidst an undemanding valuation (10x FY26F P/E, or below its 5-year mean of 12x).

• Global rate cut cycle to drive FX movement. The recent 50bps US Federal Funds Rate (FFR) cut has led to a weaker USD, (down 6% QoQ against the MYR in 3Q24). RHB Economics expects a cumulative 100bps cut in the US FFR in 2024 and an additional 100bps cut in 2025, with no change to Bank Negara Malaysia’s overnight policy rate (OPR). US FFR cuts in 4Q24 will likely spur similar moves in key developed market (DM) and emerging market (EM) economies, directly affecting the FX space. In the DM space, look for the European Central Bank and Bank of England to cut rates by 25bps in Dec 2024. In view of that, we evaluate the impact of FX movement on YTLP’s different business segments.

• YTLP’s FX exposure. PowerSeraya’s and Wessex Water’s revenue accounted for 68% and 23% of total revenue in FY24. Both of these businesses are denominated in SGD and GBP. Going forward, we estimate these two businesses to continue contributing a significant portion to YTLP’s topline but the group could likely see higher revenue exposure in USD when the AI-DC revenue is recognised. For PowerSeraya, gas feedstock – a major cost component – is denominated in USD while the bulk of Wessex Water’s cost is denominated in GBP. Meanwhile, the associate profit from the Jordan and Indonesia power plant projects as well as interest income arising from shareholder loans to its Jordan associate are also denominated in USD. Additionally, colocation services revenue will be either in MYR and USD depending on clients but cost is largely denominated in MYR. AI-DC’s revenue and cost are likely to be denominated in USD.

• We cut our FY25F-27F earnings by 5%, 6% and 6% after imputing the stronger MYR against different currencies (USD, SGD and GBP). As such, our SOP-based TP is lowered to MYR5.68 from MYR5.94. We also apply 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 - 4 Oct 2024