• YTL Power International (YTLP) reported record-breaking results, with 1QFY6/24 normalised net profit growing by a further 5% qoq to RM906m.

• 1QFY24 normalised net profit is running ahead of expectations, making up 43% of our full-year forecast and 40% of Bloomberg consensus’.

• We reiterate our Add rating and SOP-based TP of RM2.40.

1QFY24 Earnings Review

• On a normalised basis, YTLP’s 1QFY24 net profit grew by a further 5% qoq to a new quarterly record of RM906m, driven mainly by a narrowing of losses at Wessex Water and lower taxes, while profits for its power generation business (Power Seraya) was stable qoq. On a yoy basis, 1QFY24 normalised net profit grew by 504%, driven by improvements across all business segments (save for Wessex Water).

• During the quarter, revenue from Power Seraya fell 28% qoq due to a sharp decline in electricity prices in Singapore, from US$374/MWh in 4QFY23 to US$178/MWh in 1QFY24. Nevertheless, PBT held up strongly, down by just 4% qoq off the record level in 4QFY23, thanks to the favourable structure of its retail contracts, where margins are typically locked in on the onset. On a yoy basis, PBT was notably higher (+254%) as a bulk of retail contracts were renewed at the start of 2023 at higher rates.

• Losses from Wessex Water narrowed qoq in 1QFY24, following three consecutive quarters of widening losses, on the back of a 3% improvement in revenue.

• The telecommunications segment saw losses expand to RM71m in 1QFY24 (from RM9m in 4QFY23) largely due to lower project revenues (-24%) recognized in 1QFY24.

• 1QFY24 normalised net profit is running ahead of expectations, making up 43% of our full-year forecasts and 40% of Bloomberg consensus’. We expect some normalisation in retail contract margins in subsequent quarters as contracts come up for renewal.

Updates From Analyst Briefing

• Power Seraya’s retail contracts (which currently make up 75-80% of the group’s overall electricity sales volumes) have been contracted for up to 1-2 years, while its gas contracts stretch to as long as 3-4 years.

• Wessex Water is seeing lower cost pressures on the back of receding gas prices in the UK, which also aided in the narrowing of losses in 1QFY24.

• YTLP’s data centre construction works are progressing well, with the co-locator expected to complete fit-out works for 8MW (out of the 32MW firm capacity) by end- 1QCY24. The balance capacity would be equally rolled out annually over 2025-2027.

• As with any new business venture, the group’s digital banking license, which is expected to commence in 2024F, may incur some start-up losses once services are rolled out; however, the quantum is not quantifiable at this juncture.

• We maintain our Add rating on YTLP with an SOP-based TP of RM2.40, supported by a 3.5% FY24F dividend yield. We see YTL Power as well-positioned, especially with regards to the nation’s NETR electricity exports ambition, given its entrenched market position in Singapore, strategically located unique green energy data centre in Johor and new prospects in bioenergy. Key downside risk: sharper-than-expected normalisation in electricity sales margins for its power generation business, and sustained losses at Wessex Water. Re-rating catalysts include better-than-expected quarterly earnings, and new project announcements.

Source: CGS-CIMB Research - 23 Nov 2023