Unpacking YTL Power's Recent Downturn and What's Next？

YTL Power's stock surged by 267% in 2023 and continued to climb in 2024, reaching a PE ratio of 12.5x at its peak, significantly higher than the five-year average of 7.5x. However, the anticipated increase in electricity demand from data centers, a key market focus, has not yet materialized. The GB200 GPU deliveries are scheduled for the first quarter of 2025, meaning the expected capacity increase for AI data centers (initially about 20MW) may only be realized in the fiscal year 2026.

While YTL Power's second-quarter earnings exceeded expectations, mainly due to an early recovery in Wessex's operations and unexpectedly high profits from telecommunications, concerns linger. The performance of PowerSeraya, which represents 68% of the 2024 fiscal year's revenues and saw a quarter-over-quarter decrease of 7%, particularly worries the market.

Additionally, the revenues from PowerSeraya and Wessex Water, which account for 68% and 23% of the fiscal year's total respectively, are exposed to currency risks as they are denominated in Singapore dollars and British pounds, while the Malaysian ringgit continues to appreciate, posing a risk of exchange losses.

In early September, the Malaysian Anti-Corruption Commission (MACC) announced an investigation into claims of payments related to the Ministry of Education's 1BestariNet service tender, awarded to YTL Communications Sdn Bhd in 2011. Originally set for a 15-year period with a budget of RM4.07 billion, the project's duration was later reduced to seven years and six months, though the contract value did not change. The MACC's investigation, triggered by allegations of corruption, mismanagement, and abuse of power, is ongoing and casts a shadow over market confidence and YTL Power's stock price.

Overall, the market is slightly concerned about YTL Power's profit in the coming years, with some research institutions lowering their earnings forecasts. RHB Investment Bank has reduced its FY2025-2027 earnings forecast for YTL Power by 5-6% after accounting for the stronger ringgit against various currencies, which significantly impact PowerSeraya and Wessex Water, and the increased USD exposure following the commercialization of the data center (DC).

Following the release of Q4 FY2024 financial report, J.P. Morgan maintained a neutral rating on the company. They anticipate a quicker decline in PowerSeraya earnings compared to the recovery at Wessex and expect contributions from AI DC to only start materializing from FY2026. They forecast lower quarterly earnings to weigh on the stock, while optimism surrounding the DC complex's execution should keep stock performance range-bound.

On the other hand, the market remains optimistic about the company's long-term prospects, particularly in areas like AI DC, renewable energy, and digital banking. Despite the lack of substantial performance achievements currently, these areas are the focus of market trends. RHB remains positive over YTL Power's long-term earnings potential from its AI-DC development amidst an undemanding valuation.

According to Bloomberg, after the recent downtrend, YTL Power's current valuation has returned to around 7.4x, which is considered relatively reasonable. The market consensus has established a 12-month target price of RM5.76 for the company, marking a 7.5% decrease from the previous high of RM6.23. However, the target prices proposed by various analysts range from RM4 to RM7.3, indicating discrepancies and differing opinions.