YTL Power International Bhd’s Wessex Water have a potential to turnaround despite its lower earnings with quarterly pre-tax profits falling from an average of RM125 million in FY21, RM95 million in FY22 to a loss of RM23 million in FY23 as UK inflation rates rose to 1.8%, 7.8%, 12.7% in the respective years.
In its Company Note, CGS-CIMS said as at Oct 23, the UK inflation rate had moderated to 6.1%, which should translate to improved earnings for Wessex Water and could pave the way for its return to profitability as early as 2HFY24F.
“We note that Bloomberg consensus is also projecting a strong rebound in earnings for UK water companies. Given this and the sustained strength in pre-tax profits at Power Seraya as seen recently in 1QFY24 we raise our FY24/FY25/FY26 net profit forecasts for YTLP by 46%, 20%, 14% respectively.
“We now expect improvements at Wessex Water to partially offset the impact of declining contribution from Power Seraya due to normalisation of margins, as we expect its retail contracts will be renewed at lower margins,” it said today (Dec 4)
Consequently, our SOP-based TP increases to RM3.00 from RM2.40.
“YTLP’s share price has rallied 231% compared to a 3% decline in KLCI) yet the stock has de-rated on a rolling one-year forward P/E basis from 12.5x to 7x currently as it has lagged the more than 5.5x rise in Bloomberg consensus one-year forward net profit expectation.
“Hence, we feel the current price has yet to fully price in its structurally higher earnings base now compared to the past on the back of a favourable balance within Singapore’s electricity supply market.
“(Additionally), prospective turnaround at Wessex Water and buoyant longer term prospects with a slew of potential growth projects currently being explored,” CGS-CIMB said.
The research house see potential growth opportunities over the next 3 to 5 years.
“We continue to believe YTLP is well-positioned to benefit from Malaysia’s National Energy Transition Roadmap’s (NETR) electricity exports ambition given its entrenched market position in Singapore and past experience in the power business domestically.
“Its planned 500MW unique green energy data centre, strategically located in Johor, offers another growth angle as it stands to benefit from spillover demand arising from the 60MW annual capacity cap imposed in Singapore.
“YTL Power is also looking to jointly develop a RM4.5bn waste-to-energy plant in Selangor with a waste handling capacity of 2,400MT/day and an initial electricity generation capacity of 58MW.
The key downside risk include sharper-than-expected normalisation in electricity sales margins.
