Improved Outcome From PR24 Final Determination

Ofwat released its final determination for the PR24 (2025-2030) price review yesterday. We view the outcome for Wessex Water more positively compared to the initial draft determination released on 7th July 2024. This follows a resubmission of business plan and further negotiations between the regulator and industry players. In summary: (1) Average household bills (for Wessex Water) in the final determination is +21% higher against PR19 levels, as compared to a -12% reduction in the draft determination. (2) Total expenditure (totex) is higher by +14% against the draft determination and +68% higher against PR19. (3) Allowable return was raised to 4.03% as compared to 3.72% in the draft determination and 2.92% in PR19. (4) After taking into consideration the final decision totex, RCV run-off rates and pay-as-you-go (PAYG) rates, regulatory capital value (RCV) is expected to grow by 35.9% during the 2025- 2030 regulatory period.

The improved outcome of the PR24 price review is expected to drive further improvement of Wessex Water’s earnings, which had already returned to the black following a +12% annual tariff review in April 2024. Meanwhile, Wessex Water’s RCV growth of +35.9% in PR24 is above industry average and underpins longer-term returns. YTLPOWR’s share price has been on a downtrend following the rather negative outcome of the draft determination in July – we believe the more favourable final decision should address some of the initial concerns and catalyse a re-rating of the stock.

Data Centre Progress Is Next Milestone

The next milestone for YTLPOWR, in our opinion, is the commissioning of its AI data centres (DC) by mid-CY25. To recap, Phase 1-3 of the group’s DC development is targeted to be completed by 2Q-3QCY25. A total of 48MW colocation capacity is developed under Phase 1 with SEA Ltd as anchor tenant having committed to 32MW take-up. The first 8MW was delivered in May 2024 while the next 8MW to be delivered by year-end. Phase 2 entails a 100MW AI DC – the first 20MW is slated to be delivered by mid-CY25 while the remaining 80MW is targeted to complete core and shell construction within 2QCY25. Meanwhile, Phase 3, consisting of a 40MW+40MW co-location DC is already under construction with the first 40MW targeted to be delivered by 3QCY25 to a ready offtaker.

Impact

We raise FY26F/27F net profit by 1.3%/2.7% as we fine-tune our assumptions for Wessex Water in-line with Ofwat’s final decision.

Valuation

Re-affirm Buy on YTLPOWR at higher SOP-derived TP of RM6.53 (from RM6.39 previously) following the earnings revision. YTLPOWR is currently trading at attractive valuation of 11.3x FY25F PER, at a steep discount to historical mean PER of 24x. The MACC’s favourable decision on the Bestarinet project investigations coupled with the improved outcome of Ofwat’s PR24 final decision removes key overhangs on YTLPOWR.

Source: TA Research - 20 Dec 2024