YTLPOWR’s FY24 results matched our expectations. PowerSeraya’s earnings continued to fall in 4QFY24 but there were pleasant surprises in the turnaround at Wessex Water (on higher tariff) and telco unit (on construction profit). Nascent earnings of data centre booked in 4QFY24 will start to contribute meaningfully from 2HFY25 as AI data centre starts. We raise FY25F earnings by 5% with new FY26F forecasts. We upgrade our rating to OP with new TP of RM5.20 as value emerges on price weakness.

YTLPOWR’s FY24 core profit of RM3.36b met our expectation (+5%) but beat consensus estimates by 7%. A 4.0 sen 2nd interim NDPS was declared in 4QFY24 (ex-date: 12 Nov; payment date: 29 Nov), totalling FY24 NDPS to 7.0 sen (FY23A: 6.0 sen) which beat our projection of 6.0 sen.

YoY, its FY24 revenue rose 2% on higher revenues across all business segments except PowerSeraya (-6%, due to lower pool price). Wessex Water recorded higher revenue (+22%) on tariff hike and new contracts secured in the non-household retail market while telco segment posted higher revenue (+29%) on construction revenue of Sabah PoP (Point of Presence) project. Its FY24 core profit jumped 69% to RM3.36b largely due to a 50% surge in PowerSeraya earnings on better margin due to favourable gas costs locked in for the long term. Meanwhile, losses at Wessex Water and telco unit also declined as both segments turned around in 4QFY24 due to higher toplines as mentioned above.

QoQ. Its 4QFY24 core profit jumped 33% to RM925.4m on the back of 23% hike in revenue. The higher earnings were mainly led by the turnaround of Wessex Water (on tariff hike and new contracts secured as mentioned) and telco unit (on construction earnings as highlighted above). However, PowerSeraya continued to post lower earnings (- 7%), despite higher revenue (on higher pool prices), due to lower margin.

The key takeaways from its results briefing are as follows:

1. Two maiden earnings from 8MW data centre (for Sea Ltd, less than two months contributions) and RANHILL (Not Rated, about a month contributions) in 4QFY24 but earnings contributions are immaterial.

2. Besides the 48MW data centre for Sea Ltd (occupying 32 MW), data centres in the construction pipeline include a 40MW colocation data centre (a 15-year contract entered into with a hyperscaler), while another two data centres of 20MW + 80MW have been earmarked for AI. YTLPOWR does not expect a delay in AI chip delivery and expects the Blackwell Nvidia chip housed in the 20MW AI data centre to be delivered in 1QCY25.

3. The turnaround of Wessex Water in 4QFY24 was largely due to a higher tariff rate which came into force in April and will last for the next 12 months before a new tariff is set for the new regulatory period commencing April 2025. As such, the UK unit is expected to remain profitable in FY25.

4. The turnaround of the telco unit in 4QFY24 was mainly due to construction profit from the RM950m Sabah PoP project for laying of fibers over three years. As such, the telco unit is expected to recognise the earnings over the next three years.

5. Its associate incomes contracted 48% QoQ to RM47.4m in 4QFY24 due to the new power plant Attarat Power Company reporting a RM55m deferred tax liability.

Forecasts. We raise our FY25 net profit forecasts by 5% to reflect solely on the Sabah PoP project for the telco unit and NDPS projection to 7.0 sen from 6.0 sen previously. We also introduce new FY26F earnings forecasts in which we expect earnings to decline by 10% as PowerSeraya’s earnings continue to decline by 19% as margin normalises while we expect its data centre’s earnings to double from FY25. Nonetheless, we expect FY26F NDPS to remain at 7.0 sen.

Valuations. We reduced our SoP-based TP by 4% to RM5.20 (see Page 3) from RM5.44 after the roll-over of valuation-base year to FY25F and an updated of issued share. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 5).

Investment case. We continue to like YTLPOWR for: (i) its earnings stability backed by various regulated assets globally, (ii) the strong near-term earnings prospects of PowerSeraya backed by gas inventory locked in at low prices, and (iii) its longer- term growth potential driven by its data centre and digital banking ventures. Following the recent price weakness, we see value emerging. Upgrade the stock to OUTPERFORM from MARKET PERFORM.

Risks 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 - 22 Aug 2024