YTLPOWR has proposed a 1-for-5 free warrants at an exercise price with a substantial 44% discount. While this deal does not guarantee long-term shareholder retention, all considered, we are positive about this corporate exercise as the discounted exercise price presents an attractive reward for shareholders which is likely to generate buying interest. The proceeds will be used to fund key projects, particularly the data centre project. We maintain our forecasts, TP of RM5.00 and OUTPERFORM rating.

Potential fully diluted TP is adjusted downward by 10% to RM4.49.

Yesterday, YTLPOWR proposed a bonus issue of warrants. The key takeaways from the briefing are as follows:

• The proposed bonus issue of warrants involves the issuance of up to 1.67b free warrants on a 1-for-5 basis, with the exercise price set at RM2.45. The exercise price represents a 44% discount or RM1.92 to the 5-day volume-weighted average market price of RM4.3721.
• These warrants, which will not be listed and cannot be traded or transferred, have tenure of three years and can be exercised at any time before the expiry date. Should the warrants be exercised, this will increase YTLPOWR's share base by 20% or an issuance of up to 1.674b new shares.
• The warrants are expected to raise proceeds of between RM4.02b and RM4.10b, which will be allocated to current ongoing projects and future new projects.
• These proceeds will not be used to fund Wessex Water's future capex requirements (GBP4.2b expenditure planned for the 2025- 2030 regulatory period), as the UK unit will secure its own funding.

As a result, Wessex Water may pay less or no dividends to YTLPOWER due to its financial commitments.

• Similarly, the Brabazon UK property development will not receive support from the group for its GBP2b 5-year development program, as it plans to secure financing through local banks.

Furthermore, the proceeds will not be used to fund RANHILL (Not Rated) expansion, as it is the practice of YTL Group that listed companies manage their own financing requirements without assistance from the parent company.

Our view: We are positive about this corporate exercise. The proceeds will be used to fund key projects, particularly the data centre projects.

The substantial 44% discounted exercise price presents an attractive reward for shareholders and this will attract buying interest. However, this exercise does not guarantee long-term shareholder retention, as they can exercise the warrants at any time, especially since the exercise price is set at a discount to the market price. Warrants being unlisted is uncommon and thus warrant holders can only monetise through conversion to shares. To this end, we believe YTLPOWR's shareholders are most likely induced into doing so early as well to mitigate pressure of EPS dilution. On a fully-diluted basis, our TP will be adjusted to RM4.49 from RM5.00 (with a blue-sky scenario of RM5.74 from RM6.53).

Forecasts. Maintained as the proposal still has to be approved in an extraordinary general meeting.

Valuations. We retain our SoP-based TP of RM5.00 (refer to table below) with a blue-sky scenario valuation of RM6.53 should the take-up of the remaining 80MW AI data centre materialises. 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 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.

Source: Kenanga Research - 24 Jan 2025