Encouraging operational developments have been seen with YTL Power International with Independent Power Producer’s (IPP) earnings outlook for Wessex looks set to improve on the back of upcoming tariff adjustments.
GGS International (CGS), in its Company Note today (Mac 11), said they expect it to return to the black as early as 3QFY6/24F.
YTL Power International’s (YTLP) DCs are progressing well, and CGS is hopeful of positive news flow on potential off-takers by mid-2024F while they see the recent pullback in share price as good accumulating opportunity.
Wessex to enjoy higher water tariffs effective Apr 2024
Beginning 1 Apr 2024, YTLP’s subsidiary Wessex Water (WW) will impose an increase of at least 11% to water bills for its customers as part of its allowed annual water tariff adjustments. This adjustment surpasses the previous year’s Nov inflation rate, a typical benchmark for annual tariff setting, which stood at 4.2%.
WW explained in its announcement that it deliberately kept tariff increases lower than anticipated during last year’s review to alleviate the immediate financial strain on its customers amid the cost-ofliving crisis in the UK.
Consequently, this year’s adjustment serves, in part, as a recovery for the under-collection between Apr 2023 and Mar 2024.
CGS estimates the tariff revision translates into an increase of at least c.RM95m in quarterly revenue for WW, all else remaining equal.
This should translate into improved earnings for WW and could pave the way for its return to profitability as early as 3QFY24F. To recap, earnings from WW had plunged, with quarterly pre-tax profits falling from an average of RM123m in FY21 and RM95m in FY22 to losses of RM23m in FY23 and RM52m in 1HFY24.
Encouraging updates on data centre progress Phase 1 of YTLP’s colocation data centre (DC) is progressing well, with the co-locator expected to complete fit-out works for 8MW (out of the 32MW firm capacity) by end1QCY24.
In addition, Minister of Investment, Trade and Industry (MITI) Tengku Zafrul Abdul Aziz reiterated, via his social media account on 29 Feb 2024, that he has had further discussions with NVIDIA and YTLP on the DC investments, with Phase 1 coming through by Jun 2024.
While finer details on the DC projects are still lacking, our initial calculations suggest that these planned DC investments can contribute as much as RM1.2bn-1.4bn in net profit to YTLP once fully ramped up in FY27.
Pullback in share price offers a good accumulating opportunity YTLP’s share price has succumbed to selling pressure recently, with the stock down 12% since 27 Feb 2024, despite the positive operational developments discussed above.
CGS continues to see these sorts of price weakness as good opportunities to accumulate the stock. While the shares were up strongly over the past 12 months (+356%), they believe the potential value accretion from the DC investments have yet to be fully priced in.
As such, CGA reiterates Add on YTLP with an unchanged SOP-based TP of RM4.50.
The current share price implies an FY24/25F P/E of c.9-10x on an earnings base that reflects a normalisation of PowerSeraya earnings by FY26F.
Downside risks: failure to successfully execute its DCs.
Re-rating catalysts: securing off-takers for the NVIDIA DC and colocation facilities at attractive rates, and a swing back to quarterly profits at Wessex water.
