• Keep BUY, with new TP of MYR1.55 from MYR1.25, 35% upside and c.6% FY24F (Jun) yield. YTL Power delivered another strong set of results backed by the power generation division which masked Wessex Water’s contribution. Post-earnings upgrade, the stock is trading at an attractive 7x FY24F P/E, or -1.5SD from its 5-year mean. Its venture into digital banking and green data centre businesses, in our view, are long-term positives despite near-term earnings impact being minimal.

• Beat. 9MFY23 core profit of MYR964m (+5.9x YoY) significantly surpassed expectations at 123% and 113% of our and Street estimates, mainly led by the stronger-than-expected contribution from the power generation division. First interim DPS of 2.5 sen was declared.

• 3QFY23 core profit surged 7.0x YoY to MYR530m on stronger power generation (+5.0x) from higher retail prices masking the weaker Wessex Water contribution and widened losses in the telco division. Wessex Water recorded LBT of MYR47m (vs 3QFY22’s MYR89m PBT) no thanks to interest accruals on index-linked bonds which is a non-cash impact. As such, 9MFY23 core earnings also strengthened by 5.9x to MYR964m.

• Outlook. The power division (which includes PowerSeraya and Tuaspring plants) is expected to deliver solid earnings ahead, on strong wholesale prices in the near term. The Uniform Singapore Energy Price (USEP) has averaged at SGD276/MWh between Jan-Apr 2023. Despite being lower than 2022’s average of SGD291/MWh and the peak of SGD491/MWh in Oct 2021, it is still much higher than the 5-year average of SGD85/MWh between 2016-2020. We are also guided that the 45%-owned oil shale plant in Jordan has commissioned its first turbine but could incur start-up losses. While operating results will continue to be affected by accounting anomalies/additional finance cost from index-linked bonds, which has no cash impact, Wessex Water numbers are expected to improve as the tariff has been lifted by an average 9% effective Apr 2023. Construction of the 48MW IT load hyperscale data centre in Kulai is ongoing and is expected to be in service by 1QCY24. The digital banking division, collectively operated by the consortium of Sea (SE US, NR) and YTL Power, is expected to commence operations in 2024.

• Stay BUY. We raise FY23F-25F earnings by 50-65% after imputing better contribution from the power generation division. As such, our SOP-based TP is lifted to MYR1.55, coupled with a higher 6% discount based on the revised ESG score of 2.7 (from 2.9). Downside risks: Weaker-than- expected plant performance, and higher-than-expected operating costs.

• ESG framework update. As there is greater focus on the E pillar due to critical climate change issues, we have tweaked our ESG weightage. Henceforth, we assign a weightage of 50% to the E pillar, followed by 25% each to the S and G pillars. Further details are in our 2 May thematic research note titled Envisioning a Better Future.

Source: RHB Research - 26 May 2023