YTLP’s data centre foray is expected to be the group’s next phase of growth. However, this segment remains underappreciated due to lack of details – and perhaps, understanding. We have conservatively valued YTLDC for 150MW at c. RM6.3bn (benchmarked to Keppel DC REIT). We also expect Wessex Water to turnaround in FY25 and perform stronger in FY26 (under its new regulatory period). PowerSeraya will continue to anchor the group’s profit and cash flow over the coming years. We reiterate our BUY recommendation on YTLP with a higher TP of RM5.15 (from RM3.90) based on 10% discount to SOP: RM5.72.

Data centre lifter. To recap, YTLP (via wholly owned YTLDC) acquired a 50% stake in Singapore’s Dodid – a tier-3 12.5MW green hyperscale data centre back in 2021 – marking YTLP’s first step in establishing a regional data centre platform in Southeast Asia. At the same time, YTLP (through 70% owned SIPP) also acquired 664ha of oil palm estates in Kulai for RM428.8m, which the group is currently developing a 500MW data centre park (under YTLDC), powered by its 500MW solar farm (under SIPP). Fast forward to today, YTLDC’s first phase of 48MW (for SEA limited) is expected to commence operation in stages starting Apr-24. YTLP (through 60% owned YTLCom) is also collaborating with NVIDIA for the development of artificial intelligence (AI) cloud and supercomputer infrastructure (powered by the latter’s latest efficient H100 GPU chipsets), to be hosted in YTLDC’s data centre park. We believe the initial 100MW AI infrastructure will also be developed in stages over the years, estimated to cost much lower than market anticipated RM20bn. Despite the limited information available, a check on various online sources, indicates the potential revenue to be in the tune of billions with EBITDA margin of 50-70%. Management has previously indicated a small profit during starting phases and we expect gradual ramp up in profitability as the assets reach maturity stage within the next 3-4 years, alongside potential asset monetisation via a REIT structure. We currently benchmark its potential valuation to Keppel DC REIT (lower end of peers’ comparison), indicating c.RM6.3bn at a conservative 150MW capacity of YTLDC.

Wessex Water. UK’s CPI has been easing since its peak in Oct-22, which will lower inflationary pressures on Wessex Water’s performance. We continue to highlight that Wessex Water’s existing cash flow remains strong and sustainable. With the upcoming revision of tariff by Apr-24, we expect a turnaround in FY06/25. Wessex Water is also in the midst of finalising details for the regulatory period 2025-2030, which we expect to entail higher capex spending and allowable returns (driven by higher WACC), potentially further increase earnings in FY06/26.

PowerSeraya. Retail electricity prices have shown no signs of weakening for the past few months despite the lower wholesale USEP in recent months. Hence, we expect PowerSeraya’s strong earnings and cash flow to sustain into the foreseeable future given that retail contracts are entered for 1-3 years period. The earnings sustainability is expected to be further supported by new contribution of 100MW capacity imports (from Malaysia, i.e. Tenaga) and EV charging infrastructure ventures. We understand that PowerSeraya is also bidding for a new 600MW hydrogen ready power plant, which is targeted for commissioning by 2028 (we believe the capex at c. SGD900m).

Forecast. Unchanged, pending results next month.

Maintain BUY, TP: RM5.15. We reiterate our BUY recommendation, with a higher TP of RM5.15 (from RM3.90), based on 10% discount to SOP: RM5.72 – largely after incorporating the valuation for YTLDC and higher valuation for Wessex Water. We believe that current valuation remains undemanding, while earnings and dividends may continue to surprise on the upside. We expect further upside as investors come to appreciate the value of its data centre, earnings recovery of Wessex Water and sustainability of PowerSeraya.

Source: Hong Leong Investment Bank Research - 24 Jan 2024