• Keep BUY, new MYR4.70 TP from MYR5.68, 47% upside with c.2% FY25F (Jun) yield. Although YTL Power’s 1QFY25 results missed our estimate, we believe the moderation in its net profit will still be largely anchored by its UK subsidiary Wessex Water’s earnings recovery. Management guided that the first 20MW artificial intelligence data centre (AI-DC) project is on track and the negotiations on this deal are at an advanced stage.

• Below expectations. 1QFY25 core profit of MYR778m (-14% YoY) came below our expectations, at 25% and 27% of our and Street full-year estimates as we expect a weaker 2HFY25. The negative deviation was largely due to higher-than-expected index-linked bond interest costs for Wessex Water.

• 1QFY25 core profit declined 13% QoQ to MYR778m, no thanks to a weaker PowerSeraya contribution, while YTLP’s telecommunications arm was dragged by lower project billings. 1QFY25 core earnings also weakened by 14% YoY on the back of the lower PowerSeraya contribution (-27% YoY, on lower pool and retail prices). This was partially cushioned by narrower losses from the telco division and improvement in Wessex Water’s performance following a price revision, as well as earnings from Ranhill Utilities (RAHH MK, SELL, TP: MYR1.10).

• Outlook. We believe PowerSeraya’s earnings normalisation will happen gradually in FY25 and FY26, as retail contracts still account for more than 70% of its output. Meanwhile, management believes that the first 20MW AI- DC timeline is on track, as negotiations on the deal are already at an advance stage while part of the remaining 80MW AI-DC will be ready by mid-2025. Following the commercialisation of the first 8MW data centre, Sea Ltd (SE US, NR) is looking to expedite the next 8MW by next month. Over in the UK, Wessex Water’s bottomline is still dragged by the non-cash impact arising from index-linked bond interest costs – albeit at a lower amount QoQ, amidst better revenue driven by annual tariff adjustments. The outcome of a new 5- year plan will be known by the end of this year.

• We trim our FY25-27 earnings forecasts by 3%, 6% and 5% after imputing lower contributions from Wessex Water and slower progress in the AI-DC development. Our SOP-based TP drops to MYR4.70 from MYR5.68 as we impute a lower AI-DC valuation, assuming 15x EV/EBITDA with a 20% ramp up (from 40%) in 100MW DC. This is because the remaining 80MW will take some time to kick in, while YTLP updates its annual report numbers. We also apply a 2% ESG discount to its intrinsic value to derive our TP, due to the company’s 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 - 27 Nov 2024