YTL Power International - A Giant Awakens

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-0.57 (27.80%)

PowerSeraya will remain YTLPOWR’s key earnings driver over the immediate term, while Wessex Water should turn profitable thanks to a c.9% tariff hike. Attarah Power Plant in Jordan has commenced operation while YTLPOWR’s data centre and digital banking ventures will broaden its earnings base over the longer term. We maintain our forecasts, TP of RM1.48 and OUTPERFORM call.

We came away from its analysts briefing last Friday feeling positive about its earnings outlook.  The key takeaways are as follows:

1. The company expects PowerSeraya’s earnings to sustain at least in the next 2-3 years given: (i) no new plant-up of power plants in Singapore for the next three years which would sustain good retail price that it currently enjoys, (ii) no more “take or pay” LNG supply agreements which have ended between 2020 and 2023, which reduces input costs, and (iii) its locked-in low gas prices secured during the early days of the pandemic which will last for the next 2- 3 years, thus keeping its fuel cost low.

2. Wessex Water is expected to turn profitable from pre-tax losses of RM16.1m and RM47.2m in 2QFY23 and 3QFY23 (FYE Jun) after an average c.9% tariff hike from 1 Apr 2023, which should be sufficient to offset the rising operating cost. The tariff hike was to adjust for United Kingdom’s Nov 2022 consumer price index. We still believe the overall impact is neutral, if not better, as compared with pre-high inflationary period.

3. Its 45%-owned 554MW oil shale-fired Attarah Power Plant in Jordan achieved full commercial operation date (COD) recently after some significant delay from the COD, initially scheduled for Jun 2020, due to the lockdowns. They will soon receive payment from its off-taker. Recall, the investment was prompted by Jordan’s energy independence goal. At present, the Middle-Eastern kingdom depends heavily on foreign fuel sources, i.e., oil and gas to fire its power plants.

4. The RM1.5b Phase 1 of data centre in YTL Green Data Center Park in Johor is on track to meet the targeted completion in 1QCY24 and the company sees great potential in this new venture given the strong demand in this business as tech companies especially those from China such as Alibaba, Sea Ltd and others set up their server in Southeast Asia. Meanwhile, the company expects Sea Ltd-YTL Digital Bank, a consortium comprising regional e-commerce giant Sea Ltd and YTLPOWR’s wholly owned YTL Digital Capital Sdn Bhd, to contribute earnings in FY25. Recall, the consortium was one of the five successful bidders for Bank Negara Malaysia’s digital banking licences in Apr 2022.

Forecasts. Maintained. Our forecasts have not reflected any contribution from the data centre project.

We also maintain our TP of RM1.48 based on sum-of-parts valuation (see Page 2). There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

We continue to like YTLPOWR for: (i) its improved earnings prospects with the turnaround of PowerSeraya, (ii) the revised new tariff rate from Apr 2023 keeping Wessex Water’s earnings resilient, and (iii) huge earnings potential from the new data centre venture. In addition, its dividend yield is attractive at c.4%. Maintain OUTPERFORM.

Risk to our recommendation include: (i) stringent ESG standards in developed markets, (ii) regulatory risk in the power sector in Singapore, (iii) the new data centre business fails to take off, and (iv) sustained losses at YES.

Source: Kenanga Research - 6 Jun 2023

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