Review

• YTL Power International Berhad’s (YTLPOWR) 1QFY25 core net profit of RM754.7mn (-16.7% YoY) came in within expectations accounting for 26% of our and 24% of consensus’ full year estimates. Our core net profit calculation excludes RM284mn of EIs mainly comprising unrealised forex loss arising from USD denominated shareholder loan extended to its Jordan associate.

• QoQ: 1QFY25 core earnings fell -10.6% QoQ as the telco division fell into a marginal pretax loss of -RM25mn in 4QFY24 against a -25.9% QoQ drop in revenue, which we reckon is due to variation in milestone recognition of the group’s 3-year Sabah point of presence project. For Seraya, despite a - 21% QoQ drop in revenue, which is reflective of lower fuel cost, pretax profit contribution held up well given that profit margin in absolute terms remained largely stable as contracts are structured on a cost-plus basis. Wessex Water remained in the black with stable earnings contribution following a 12% tariff adjustment in April 2024.

• YoY: 1QFY25 core earnings fell -16.7% YoY mainly dragged by Seraya. This is reflective of normalising earnings as retail contracts are gradually rolled over and is well within expectations. In addition, normalising pool prices dragged earnings, albeit marginally, as only an estimated 10% of Seraya’s volumes are exposed to the spot market. Positively, Wessex Water returned to the black against a pretax loss of -RM35mn in 1QFY24, boosted by the tariff adjustment in April 2024 and receding interest accruals on index-linked bonds given easing UK inflation rate. In addition, the water & sewerage segment was boosted by contribution from Ranhill Utilities’ Johor water business, which is estimated to have accounted for up to 20% of the segment’s pretax profit during the period (Ranhill Utilities’ overall contribution to group pretax in 1QFY25 is estimated at 4.5%).

Impact

• No change to our earnings forecasts as the result was in-line with our expectation.

Outlook

• Power Generation: We expect gradually normalising earnings contribution from Seraya by FY25-26 as retail electricity contracts with higher tariffs and favourable natural gas hedges gradually expire, while new capacity is expected to kick in from CY26. Nonetheless, the segment is expected to remain a major earnings contributor in the near-to-medium term, while the group’s upcoming 600MW hydrogen-ready CCGT power plant is expected to expand Seraya’s capacity by an estimated 20% once operational by December 2027. At estimated capex of SGD800mn (RM2.8bn), 21-year plant life and high-single digit PIRR, we estimated the new plant could add circa 20sen/share to our SOP valuation.

• 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. A final decision on new regulatory parameters is expected to be announced towards end-2024 or early-2025. Nevertheless, given the latest annual tariff adjustment, we expect the segment to turnaround from FY25 onwards.

• Data Centre: YTLPOWR’s green data centre (DC) park in Kulai can accommodate a total 500MW DC capacity in the long run. The group has allocated 100MW for AI DCs (which will be operated by 60%-owned YTL Communications) but may increase the allocation depending on demand. The first 20MW AI DC is at the tail end of contract negotiation and is on track to be fully fitted by 1QCY25 with potential commissioning by midCY25. Meanwhile, contracts for another 80MW AI DC capacity are being actively negotiated with potential offtakers and is expected to be partially fitted around 2QCY25.

• As for the group’s IT load co-location DC, Phase 1, which entails 48MW capacity, already has Sea Limited as its anchor tenant with firm take-up of 32MW capacity. The first 8MW commenced operations in mid-May 2024 with additional 8MW scheduled to be taken up each year. Positively, we understand that commissioning of the next 8MW for Sea Limited has been accelerated to December 2024. In addition to Phase 1, there is another 40MW co-location DC under construction with a firm 15-year contract.

Valuation

• Maintain Buy on YTLPOWR at unchanged SOP-derived TP of RM6.39. We believe the recent weakness in YTLPOWR’s share price presents a cheap entry opportunity into one of Malaysia’s key AI DC proxies. YTLPOWR now trading at attractive valuation of 8.9x FY25 PER, at a steep discount to historical mean PER of 24x.

Source: TA Research - 27 Nov 2024