We have fine-tuned our earnings model following a recent site visit to YTL Data Centre Park in Johor. The delivery timelines for the AI DC (JDC2) and JDC3 remain on track, albeit negotiations with off-takers for the 2nd phase of both DCs are yet to be finalised. We see value in YTLPOWR, with the recent share price retracement presenting a buying opportunity. However, the key focus remains on DC delivery over the next 12 months, which is crucial to its earnings performance. We maintain our OP rating and TP of RM5.00 with a potential blue sky fair value of RM6.53.

We visited YTL Data Centre Park recently. The key observations are as follows:

• YTL Data Centre Sdn Bhd (YTL DC) is the asset owner and developer of YTL Data Centre Park. The 600MW data centre park will be developed in five phases over 10 years, primarily using in-house construction by YTL Corporation Bhd (YTLCORP; Not Rated) and connectivity infrastructure provided by YTL Communications. Currently, only Phase 1 (JDC1), Phase 2 (JDC2), and Phase 3 (JDC3) are either completed or under construction which account for 38% of the total 600MW.
• JDC1 - 48MW: Sea Ltd is the offtaker for 32MW of capacity, with 8MW already delivered in 1QCY24. The second block of 8MW is scheduled for delivery by the end of this year. According to the schedule, the third and fourth blocks of 8MW each will be delivered to Sea Ltd in 1QCY26 and 1QCY27, respectively.
• JDC2 - 100MW: Of this AI-focused data centre, with Nvidia as a partner, 20MW will be taken up by YTL AI (a separate entity from YTL DC), This capacity is expected to be ready by 1QCY25, while the delivery of building for remaining 80MW will be delivered by 2QCY25. According to NIVDIA website (link), YTL Communications enjoys the status as a Preferred-status cloud partner.
• JDC3: The first building, with a capacity of 40MW, has secured an offtake agreement under a co-location model. The "core and shell" structure is expected to be delivered by mid-2025. The delivery timeline for the 2nd building is yet to be finalised, as negotiations with a potential offtaker (likely the same entity as the first building's offtaker) are ongoing. While JDC3 adopts a co-location model, the M&E systems will be customised to meet the specific requirements of the client.
• Construction Timelines: JDC1, a three-story building, took two years to complete its "core & shell" structure. In contrast, JDC2 and JDC3, which are two-story buildings, are expected to have construction periods of 14 months each.
• Cooling Systems - Air vs. Liquid Cooling: JDC1 and JDC3 use air-cooling systems, while JDC2 will adopt an 80% liquid cooling and 20% air cooling configuration. Liquid cooling systems are essential for AI data centres, whereas air cooling suffices for non-AI data centres. JDC2 will implement direct-to-chip liquid cooling, one of two types of liquid cooling systems (the other being immersion cooling).
• Facility and IT Load: The YTL Data Centre Park will have a total facility load of 600MW, with an expected IT load of 430MW, implying a Power Usage Effectiveness (PUE) of 1.4. During our site visit, the IT load for Sea Ltd's first block of 8MW was live at 5.5MW.

Our view: While this was an educational site visit with no financial disclosures, it provided valuable insights into YTL DC, particularly the DC delivery schedule. We continue to see significant value in YTLPOWR following the recent share price retracement. However, the key focus remains on DC delivery, which will be critical to its earnings performance. While our current estimates are relatively conservative, this site visit allowed us to refine our model. Under a blue-sky scenario, our fair value that can be attained would be RM6.53 (see page 3), if the DC earnings delivery fully materialises as anticipated, representing another 30% upside to our target price. In deriving the AI-DC valuations, we use observable benchmarks and apply 3x of sales valuations. As at end-Dec 2023 (link), Coreweave which is a first mover and NVIDIA partner was already valued at USD7b, of which its projected revenue has been reported to be USD2b in 2024 (link), equivalent to 3.5x sales valuation. We apply 3.5x to follow this valuation under a blue sky scenario

Forecasts. We have fine-tuned our earnings model to incorporate updated assumptions for the DC segment (see table below).

As a result, we maintain our FY25 net profit forecast, while raising our FY26 earnings estimate by 9%. We anticipate the AI DC will have a significant impact on FY27 earnings, with a projected net profit of RM987.9m once JDC2 becomes fully operational at 100MW capacity. In our forecasted numbers, we have assumed only 20 MW for AI DC.

Valuations. We retain our SoP-based TP of RM5.00 (refer to table below), as we prefer to wait for the take-up of the remaining 80MW AI DC to materialise before considering a blue-sky scenario valuation. Please refer to Sum of Parts Valuation table for our valuation methodology which for now we have left unchanged. No adjustments have been made to our TP based on ESG considerations, which currently reflect a 3-star rating as assessed by us (see Page 6).

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.

Source: Kenanga Research - 9 Dec 2024