YTLPOWR's 1QFY25 results came below our expectations as we had expected a turnaround in its telco unit which did not materialise. PowerSeraya's earnings also continued to decline as expected given poorer margin as pool and retail prices fell.

However, data centre (DC) projects are on track with 2nd batch of 8MW to Sea Ltd to commence early, by this year-end while AI chips for AI DC are on track for delivery by 1QCY25 for 20MW and 2QCY25 for 80MW. We trim FY25/FY26 earnings forecasts by 9%/6% to adjust for the telco unit. Maintain OP with a lower TP of RM5.00.

1QFY24 results below. YTLPOWR reported 1QFY25 core profit of RM776.3m, falling short of expectations which made up 24%/25% of house/street's FY25 full-year forecast as we expect its earnings to continue to decline in the coming quarters, mainly from PowerSeraya as margin normalises. The main discrepancy was due to the telco unit continuing to post losses against our profit assumption. No dividend was declared as expected as it usually pays dividend in the 2H of the financial year.

PowerSeraya's earnings continued to decline. YoY, 1QFY25 core profit fell 15% to RM776.3m despite revenue rising 4% (due to higher Wessex Water revenue on a 12% tariff hike on inflationary adjustment). The decline in earnings was mainly due to weaker earnings from PowerSeraya (-27%) on lower pool and retail prices.

However, the water business turned profitable on the said 12% tariff hike while losses at the telco unit narrowed by 66% due to higher project revenue recorded.

Telco unit led the sequential decline. 1QFY25 core profit declined 16% QoQ to RM776.3m on the back of 10% contraction in revenue.

The telco reported LBT of RM24.6m from PBT of RM37.5m in 4QFY24 where the preceding quarter included construction profit while the low revenue was unable to turn the telco unit profitable. PowerSeraya reported a lower PBT by 5% partly due to a decline in margin as its USD-input cost strengthened against its SGD-billing to customer. The water unit also posted a lower PBT despite higher revenue by 11% with the inclusion of RANHILL earnings (full quarter vs. one-month contributions) The key takeaways from its results briefing are as follows:

1. While first 8MW DC (for Sea Ltd) has already commenced in May, the 2nd batch of 8MW DC is expected for an early delivery to Sea Ltd by this year end as opposed to the scheduled delivery in 1QCY25. Management expects an IRR of 10%-13% for this Phase 1 project 2. The next phase of 40MW DC is finalising with client, with the delivery of shell & cell to client by 2QCY25 while the M&E work will be over three phases, to be ready by 3QCY24. Meanwhile, the 100MW AI DC phase, the delivery of AI chips remains on track - 20MW by 1QCY25 and 80MW by 2QCY25.
2. The LBT of RM112.6m in 1QFY25 was mainly due to higher unrealised forex loss of RM293.3m (a non-cash item), of which RM270m arose from a shareholder loan extended to the Jordan project entity - Attaral Power Company

Forecasts. We trimmed our FY25-FY26 earnings forecasts by 9% and 6%, mainly to adjust for the telco earnings assumptions as we expect it to be loss-making (LBT margin of 15% from PBT margin of 10% previously). However, we keep our NDPS assumption unchanged at 7.0 sen for both FY25 and FY26.

Valuations. Post-earnings revision, we reduced our SoP-based TP by 4% to RM5.00 (see Page 3) from RM5.20, solely on cash flow adjustment. 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. Maintain OUTPERFORM.

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.

Singapore IPP 3,268.3 4,121.3 -21% 3,796.3 -14% 3,268.3 3,796.3 -14% Water & Sewerage 1,737.5 1,570.1 11% 1,214.3 43% 1,737.5 1,214.3 43% Telco Business 233.8 315.5 -26% 184.4 27% 233.8 184.4 27% Investment Holding 443.9 334.4 33% 250.7 77% 443.9 250.7 77% Group revenue 5,683.5 6,341.4 -10% 5,445.7 4% 5,683.5 5,445.7 4% Segment result:

Singapore IPP 746.7 785.2 -5% 1,025.1 -27% 746.7 1,025.1 -27% Water & Sewerage 55.3 69.0 -20% -34.8 N/A 55.3 -34.8 N/A Mobile Broadband Network -24.6 37.5 -166% -71.5 -66% -24.6 -71.5 -66% Investment Holding -112.6 347.5 -132% 112.6 -200% -112.6 112.6 -200% Group PBT 664.8 1,239.2 -46% 1,031.5 -36% 664.8 1,031.5 -36% PBT margin:

Source: Kenanga Research - 27 Nov 2024