Review

• YTL Power International Berhad’s (YTLPOWR) FY24 core net profit of RM3.28bn (+58.7% YoY) came in within expectations accounting for 104% of both our and consensus estimates. Our core net profit calculation excludes RM187mn of EIs arising mainly from fair value gains on YTLPOWR’s stake in Ranhill Utilities Berhad.

• QoQ: 4QFY24 core earnings rose 20.8% QoQ driven by (i) a turnaround in Wessex Water’s earnings driven by its annual tariff adjustment, lower interest expense on index linked bonds and new contracts secured within the non-household retail market (ii) a turnaround in earnings at the telco division driven by higher revenue related to a point of presence (PoP) rollout project in Sabah worth a total RM947m. We reckon the turnaround of these two divisions are sustainable given that UK inflation rate is expected to have stabilised, relieving cost pressures at Wessex Water. Meanwhile, the Sabah PoP project is expected to be rolled out over the next 3 years giving a sustainable revenue uplift for the telco division in the medium-term.

• YoY: 4QFY24 core earnings fell by 23.4% YoY dragged mainly by lower revenue at Power Seraya given normalised pool prices though this was partly offset by lower interest expense following loan repayments and strengthening of the SGD against MYR during the period. The weakness at Power Seraya, however, was cushioned by earnings turnaround at Wessex Water and the telco division as mentioned above. Associate earnings saw a steep fall (-61.5% YoY), which was mainly due to a one-off RM55mn deferred tax liability recognition for 45%-owned Attarat Power during the quarter.

• YTD: FY24 core net profit rose 58.7% YoY mainly driven by Power Seraya, which benefitted from better margins and a stronger SGD against MYR during the period.

Impact

• No change to our earnings forecasts. We introduce FY27 net profit at RM3.08bn (+1.9% YoY). We expect data centre earnings to have kicked in more meaningfully by then to compensate gradually normalising earnings at Power Seraya.

Outlook

• Power Generation: We expect gradually weaker performance in the segment by FY25-26 as retail electricity contracts with higher tariffs and favourable hedges for natural gas gradually expire and as new capacity starts to kick in from CY26. Nonetheless, the segment is expected to remain a major earnings contributor in the near-to-medium term.

• Water and Sewerage: Wessex Water is expected to register improving earnings moving forward as cost and inflationary pressure eases. The group has submitted its business plan for 2025-2030 to Ofwat in October 2023.Water tariff adjustment, if approved, will be announced by the end of 2024. We expect the segment to turnaround from FY25 onwards.
   
• Telecommunications: Potential growth will be from AI cloud computing services, which will be provided by 60%-owned YTL Communications. AI cloud computing’s demand is surging globally. The group allocated 100MW of its 500MW Green Data Centre for AI cloud computing but may increase the allocation depending on demand. In the medium-term, the newly secured RM947m Sabah PoP project is expected to give a sustainable revenue uplift for the next 3 years as the project rolls out.
   
• Investment Holdings: We are upbeat on YTLPOWR’s 500MW Green Data Centre project. Of note, its phase I 48MW IT Load Hyperscale Data Centre already has Sea Limited as its anchor (taking up 32MW). 8MW has already commenced around mid-May, with 8MW scheduled to be taken up each year. Overall, we do not expect data centre contribution to be significant yet in the near term but will be an important earnings driver once scaled up. We gather that there are another three data centres under construction involving two AI data centres (20MW and 80MW capacity) and another 40MW colocation facility with a 15-year contract.

Valuation

• We tweak higher our SOP-derived TP to RM6.39/share (from RM6.35/share previously) as we factor in YTLPOWR’s latest 53% stake in Ranhill Utilities. In our view, the recent weakness in YTLPOWR’s share price presents a good entry opportunity into one of Malaysia’s key AI data centre proxies. The stock is now trading at undemanding valuation of 10.4x FY25 EPS, at a steep discount to historical mean PER of 24x. Maintain BUY.

Source: TA Research - 22 Aug 2024