• Keep BUY, TP rises to MYR2.95 TP from MYR2.72, 22% upside with c.3% FY24F (Jun) yield. We have a long-term positive view on YTL Power’s new collaboration with Nvidia. The two companies will work on developing an artificial intelligence (AI) project to explore new sources of income. The project may also boost its data centre take-up rate in Johor. YTLP’s earnings growth should strengthen upon the successful delivery of the project delivery in the long run, but investors ought to take note that additional capex requirements ahead could be rather intensive.

• Partnering with Nvidia on an AI development project. Last Friday, YTLP announced its collaboration with US tech giant Nvidia to develop AI infrastructure in Malaysia. Reuters said that the investment deal could be worth USD4.3bn. YTLP’s 60%-owned YTL Communications (YTL Com) will own and manage the AI infrastructure, which will be hosted in YTLP’s Green Data Centre Park in Kulai, Johor. Phase 1 of this AI project is expected to be operational by mid-2024.

• We are positive on such a development which may accelerate YTLP’s potential expansion and the take-up rate of its data centres (DC) in Kulai. The DC would then subsequently be leased to YTL Com to establish the AI infrastructure hub, which would leverage on Nvidia’s expertise and chips. Eventually, the hub would generate additional revenue by being an AI-cloud service provider. We estimate the size of phase 1 of the potential DC development at c.100MW. Apart from the DC development capex – which could be <MYR30m/MW – YTL Com may have to incur additional capex (including that for chip acquisitions) in order to offer AI-specific applications and services to clients. Meanwhile, YTLP plans to use NVIDIA NeMo, an end-to-end cloud-native framework, to customise and deploy a Bahasa Malaysia-based foundation model – which may mean that the Government could be a potential client, as well as private corporations.

• Earnings impact. We are unable to ascertain the earnings impact of this YTLP-Nvidia deal at present, but believe that such developments can be rather capex-intensive. For its current 48MW DC (estimated capex: MYR1.5bn), the contract tenure is more than 10 years and we estimate it to potentially generate PBT of MYR100m pa. As such, if we were to extrapolate such numbers to its full capacity, a total 500MW data centre could deliver MYR1bn in PBT (c.30% of our FY24F PBT). This is excluding any potential earnings from AI-specific applications and services.

• Our SOP-based TP rises to MYR2.95 after we imputed a higher valuation for DCs (from 300MW to 500MW over the next decade) and higher multiple for its telecommunications arm (from 0.5x to 1.0x P/BV) to account for the stronger growth profile. Our TP also includes an ESG discount of 2% based on our ESG score of 2.9 out of 4. Downside risks: Weaker-than-expected plant performance, and higher-than-expected operating costs.

Source: RHB Securities Research - 11 Dec 2023