RHB Investment Bank’s (RHB IB) preliminary estimates for YTL Power International Bhd (YTL Power) recent collaboration with Nvidia to build artificial intelligence-data centre (AI-DC) suggest a full ramp-up in the 100MW AI-DC could generate average gross annual net earnings of USD130 million.
“(Out of this), 60% attributable to YTL Communications Sdn Bhd,” it said in its Malaysia Company Update today (Jan 29).
The research house stayed positive on the group given its resilient earnings from YTL PowerSeraya Pte Limited and gradual improvements subsidiary from Wessex Water Services Limited.
The research house kept its BUY call and increase its FY24F to FY26F earnings by 14 to 56%, mainly on higher PowerSeraya contributions.
Consequently, its target price (TP) is also lifted to RM4.69 with the incorporation of higher PowerSeraya and AI-DC valuations (12x EV/EBITDA).
“We also incorporated a 2% ESG discount based on YTL Power’s environmental, social, and corporate governance (ESG score of 2.9 vis-à-vis the 3.0 country median.”
The downside risk of RHB IB’s call are weaker-than-expected plant performance and higher-than-expected operating costs.
Elaborating further, the research house said that PowerSeraya is still the powerhouse as more than 70% of total output are still holding up quite well for retail market prices.
“We believe the earnings moderation may not be as significant as we initially anticipated, given that locked-in gas prices should still deliver decent margins.
“This is despite the Uniform Singapore Energy Price or USEP – the reference for pool prices – having retraced to SGD131 per MWh in December 2023, a decrease of 26% month-on-month (MoM), and 37% year-on-year respectively.
“We estimate 15% of the total output generated is sold in the pool market, as the remaining 15% is still under vesting contracts that generally offer relatively fixed margins.
“As such, we lift our PowerSeraya earnings contributions predominantly in FY25 to 26 on more resilient margins,” it said.
Elaborating further on Nvidia AI-DC collaboration, RHB IB said it walked away from a recent closed group meeting with YTL Power managing director Datuk Seri Yeoh Seok Hong with more insight on the matter.
“Through this partnership, it is able to be in the priority list of chip access and has potential introduction to relevant clients that tap on Nvidia’s network. The latter has cloud partners that require supercomputing powers and high capacity storage.
“Although YTLP is aiming to kick-start its first 100MW Phase 1 AI-DC in six to 12 months, this ultimately depends on how soon the infrastructure can be set up and clients’ contracts sealed.”
Therefore, the research house said earnings assessments are premature at this point, as contract hasn’t been locked in.
However, assuming a capex of USD3bn, annual revenue of USD140,000 per server under a 5-year contract, 60% EBITDA margins, and 70% debt financing, the research house estimate a full ramp-up the 100MW AI-DC could deliver average gross annual net earnings of USD130 million.
“(This is) equivalent to 29% of FY22 core earnings) with a project internal rate of return (IRR) of 10%.”
